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Pair Trading

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Pair Trading
PAIR TRADING STRATEGIES

Presented by:

Industry Guide: Faculty Guide:

Anand Agrawal - 09206 Sulagn Patanaik - 09150

Mr. Vivek Gupta Prof. Devi Prasad Bedari & Dr. Jaba M. Gupta

Company:

CapitalVia Global Research Ltd.

Road Map
About CapitalVia Why Pair Trading? Project Objective Scope What is Pair Trading? Methodology Strategy Analysis Observations Findings Limitations Future Scope
Pair Trading 1 November 2010

CapitalVia Global Research Ltd.
Investment advisory firm
Stock tips Commodity tips F&O

Intensive research in stock market Customers: Pan India Offices in India: Bangalore and Indore Expanding at rapid rate
Pair Trading 1 November 2010

Why Pair Trading
Niche strategy Opportunity in Indian market Only FOREX

Pair Trading

1 November 2010

Project Objective
Analyzing different Pair Trading Strategies Finding most profitable pairs

Pair Trading

1 November 2010

Scope
Where
BSE NSE MCX NCDEX

What
Stock – Sector wise Commodity – Stock (Sector) Index – Stock
Pair Trading 1 November 2010

Scope
Where
BSE NSE MCX NCDEX
Our Scope Software Pharma Bank-Public Bank-Private Automobile Telecom Refinery Cement Real Estate

What
Stock – Sector wise Commodity – Stock (Sector) Index – Stock
Pair Trading

1 November 2010

Pair Trading
A nondirectional, relative-value investment strategy
Market Neutrality

Pair Trading
Technical analysis Statistical arbitrage

Pair Trading

1 November 2010

Market-Neutral Strategy

• Share Neutrality • Dollar Neutrality • Beta Neutrality
Pair Trading 1 November 2010

Market-Neutral Strategy
Share Neutrality
Equal Number of long and short shares Disproportionate amount of exposure between the two legs of the trade

Dollar Neutrality
Equal amounts of long and short investments Net Dollar Exposure to Market Swing = 0

Beta Neutrality
Balancing the beta of long side of portfolio with that of short side of portfolio +β Pair Trading α +ve Market and -β α -ve Market 1 November 2010

Methodology
Select stocks Historical Data


References: Wiley Finance,.Pairs Trading - Quantitative Methods and Analysis : GANAPATHY VIDYAMURTHY The Handbook of Pairs Trading : DOUGLAS S. EHRMAN New approaches to statistical pair trading by cointegration by P.L. Rasmussena Pairs Trading: A Cointegration Approach by Arlen David Schmidt Using Neural Networks to Forecast Stock Market Prices by Ramon Lawrence Neural Network Predictions of Stock Price Fluctuations by Wojciech Gryc Neural Network Pair Trading by Marge Sherald Dynamic Pairs Trading Strategy For TheCompanies Listed In The Istanbul Stock Exchange by Bolgun,Ervin An Anatomy of Pairs Trading: the role of idiosyncratic news, common information and liquidity by Joseph Engelberg, et al Pair Trading 1 November 2010 Thank you Pair Trading 1 November 2010
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