Pairs trade

Pairs trade

The pairs trade was developed in the late 1980s by quantitative analysts and pioneered by Gerald Bamberger while at Morgan Stanley. With the help of others at Morgan Stanley at the time, including Nunzio Tartaglia, Bamberger found that certain securities, often competitors in the same sector, were correlated in their day-to-day price movements. When the correlation broke down, i.e. one stock traded up while the other traded down, they would sell the outperforming stock and buy the underperforming one, betting that the "spread" between the two would eventually converge.

"'Some real-life examples of potentially correlated pairs: "'

*Coca-Cola (KO) and Pepsi (PEP)
*Wal-Mart (WMT) and Target Corporation (TGT)
*Dell (DELL) and Hewlett-Packard (HPQ)
*Ford (F) and General Motors (GM)
*Alliance and Licester (AL.L) and Royal Bank of Scotland (RBS.L)

The pairs trade helps to hedge sector- and market-risk. For example, if the market as a whole crashes and your two stocks plummet along with it, you should experience a gain on the short position and a negating loss on the long position, leaving your profit close to zero in spite of the large move. In a pairs trade, you are not making a bet on the direction of the stocks in absolute terms, but on the direction of the stocks relative to each other.

Algorithmic Pairs Trading

Today, Pairs trading is often conducted using algorithmic trading strategies on an Execution Management System. These strategies are typically built around models that define the spread based on historical data mining and analysis. The algorithm monitors for deviations in price, automatically buying and selling to capitalize on market inefficiencies. The advantage in terms of reaction time allows that traders to take advantage of tighter spreads.

External links

* [http://www.valuestockreports.com/030207.htm Pairs Trading with ETFs]
* [http://www.traderslog.com/trading-pairs.htm Trading Pairs by Douglas S. Ehrman]
* [http://luminouslogic.com/a-pairs-trading-example.htm A Pairs Trading Example: Lowes and Home Depot]


Wikimedia Foundation. 2010.

Игры ⚽ Нужно решить контрольную?

Look at other dictionaries:

  • Pairs Trade — The strategy of matching a long position with a short position in two stocks of the same sector. This creates a hedge against the sector and the overall market that the two stocks are in. The hedge created is essentially a bet that you are… …   Investment dictionary

  • LEATHER INDUSTRY AND TRADE — Biblical and Talmudic Times The one Hebrew word רֹוע (or) covers skin, hide, and leather, so that it is difficult to establish whether references in the Bible are to skin or leather. The Bible frequently refers to garments made from skin (e.g.,… …   Encyclopedia of Judaism

  • Comparison of Pairs of Outcomes by the Single Transferable Vote — CPO STV, oder Comparison of Pairs of Outcomes by the Single Transferable Vote (Paarweiser Vergleich von Ergebnissen der Übertragbaren Einzelstimmgebung) ist ein Präferenzwahlverfahren, das eine proportionale Abbildung des Wahlergebnisses im Sinne …   Deutsch Wikipedia

  • Currency strength — expresses the value of currency. For economists, it is often calculated as purchasing power,[1] while for financial traders, it can be described as an indicator, reflecting many factors related to the currency; for example, fundamental data,… …   Wikipedia

  • Modern portfolio theory — Portfolio analysis redirects here. For theorems about the mean variance efficient frontier, see Mutual fund separation theorem. For non mean variance portfolio analysis, see Marginal conditional stochastic dominance. Modern portfolio theory (MPT) …   Wikipedia

  • Short (finance) — Schematic representation of short selling in two steps. The short seller borrows shares and immediately sells them. He then waits, hoping for the stock price to decrease, when the seller can profit by purchasing the shares to return to the lender …   Wikipedia

  • National Stock Exchange of India — National Stock Exchange राष्ट्रीय शेअर बाज़ार …   Wikipedia

  • Dual-listed company — Dual listed companies should not be confused with cross listed companies, where the stock of one company is listed on more than one stock exchange. A dual listed company or DLC is a corporate structure in which two corporations function as a… …   Wikipedia

  • Mean reversion (finance) — For other uses, see Mean reversion (disambiguation). Mean reversion is a mathematical concept sometimes used for stock investing, but it can be applied to other assets. In general terms, the essence of the concept is the assumption that both a… …   Wikipedia

  • Day trading — This article is about the practice. For the occupation, see Day trader. Day trading refers to the practice of buying and selling financial instruments within the same trading day such that all positions are usually closed before the market close… …   Wikipedia

Share the article and excerpts

Direct link
… Do a right-click on the link above
and select “Copy Link”