Pairs trading using cointegration in pairs of stocks

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dc.contributor.advisor Dodds, J. C. (James Colin)
dc.creator Bharadwaj, Manda Raghava Santosh
dc.date.accessioned 2015-05-14T14:34:10Z
dc.date.available 2015-05-14T14:34:10Z
dc.date.issued 2014
dc.identifier.uri http://library2.smu.ca/xmlui/handle/01/26133
dc.description 1 online resource (ii, 47 p.) : col. ill.
dc.description Includes abstract and appendices.
dc.description Includes bibliographical references (p. 25-27).
dc.description.abstract The aim of this project is to implement pair trading strategy, which aims to generate profits in any market conditions by examining the cointegration between a pair of stocks. Pair Trading, also known as a relative spread trading, is a strategy that allows a trader to benefit from the relative price movements of two stocks. A trader can capture the anomalies, relative strength or fundamental differences in the two stocks to create profit opportunities. Pair Trading primarily involves finding correlated stocks and exploiting the volatile market conditions, which lead to a diversion in their correlation. A trader takes a short position in one stock and simultaneously takes a long position in the other. If the market goes down, the short position makes money. On the other hand, if the market goes up, the long position makes money. Creating such a portfolio enables the investor to hedge the exposure to the market. Furthermore, by taking a long-short position on this pair, when prices diverge, and then closing the position when the spread retreats to its mean or a threshold, a profit is earned. In this project, we implement pair trading strategy using an Ornstein-Uhlenbeck (OU) process based spread model, is applied on stocks from three different sectors - Energy, HealthCare and Banking of the NYSE. Stocks were selected based on a combination of Distance Test, ADF Test and Granger-Causality Test. The paper concludes by summarizing the performance of this strategy and offers possible future enhancements and applying it to more complex scenarios. en_CA
dc.language.iso en en_CA
dc.publisher Halifax, N.S. : Saint Mary's University
dc.title Pairs trading using cointegration in pairs of stocks en_CA
dc.type Text en_CA
thesis.degree.name Master of Finance
thesis.degree.level Masters
thesis.degree.discipline Finance, Information Systems, & Management Science
thesis.degree.grantor Saint Mary's University (Halifax, N.S.)


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