In the previous post I tested distance method of pair selection (you can read it here). We found out that it was not very good in finding pairs of stocks that do not diverge too much during the trading period. In this short article I would like to implement several possible improvements to the distance method and…

In the previous post I described the basic principles of pairs trading strategies. Now I’d like to explore one of the most famous methods of pair selection, namely distance method. It was described in the paper ‘Pairs Trading: Performance of a Relative Value Arbitrage Rule’ (Gatev et al. 2006). I’m going to implement this method…

With this post I start a series of articles where I am going to describe, implement and test different aspects of pairs trading strategies. The basic idea of pairs trading is to find pairs of securities (usually subject to similar risks) which tend to move together. We expect to find a long term equilibrium relationship…