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Pairs Trading

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10 views3 pages

Pairs Trading

Uploaded by

kushagrasirohi2910
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Finance Club

Open Project Summer 2024

Title: Pairs Trading Algorithm for Financial Markets (#FC24OPS2)

Overview:The project aims to design and implement a pairs trading algorithm to identify
and exploit temporary mispricing opportunities between correlated assets in financial
markets. Pairs trading involves taking simultaneous long and short positions in two
related instruments to profit from the convergence of their prices.

Objectives:

1. Develop a pairs trading strategy based on statistical arbitrage principles to


identify pairs of assets exhibiting cointegration or mean-reverting behavior.
2. Collect historical price data for a diverse set of financial instruments, including
stocks, ETFs, or futures contracts, to build the trading universe.
3. Conduct statistical analysis to identify pairs of assets with a high degree of
correlation or co-movement in prices over time.
4. Implement a trading algorithm to generate buy and sell signals based on
predefined criteria, such as the spread between the prices of the two assets
exceeding a certain threshold.
5. Backtest the pairs trading algorithm using historical data to assess its
performance in terms of profitability, risk-adjusted returns, and consistency.
6. Optimize the algorithm parameters and trading rules through iterative testing and
refinement to enhance its effectiveness and robustness.

Scope:

● The project will focus on implementing a pairs trading strategy in a specific


financial market or asset class, such as equities or cryptocurrencies.
● The algorithm will be designed to accommodate different trading frequencies,
from intraday to longer-term holding periods, based on the preferences and risk
tolerance of the user.
● The project will consider the use of advanced techniques, such as machine
learning algorithms, to enhance the predictive power and adaptability of the
trading strategy.

Deliverables:

● A pairs trading algorithm implemented in a Python notebook, along with


documentation detailing its logic, inputs, and outputs.
● A comprehensive backtesting report providing insights into the historical
performance of the trading strategy, including key performance metrics and risk
analysis.
● A user guide or tutorial explaining how to use the algorithm, interpret trading
signals, and adjust parameters for optimal results.

Constraints:

The availability and quality of historical price data may vary across different financial
instruments and markets, requiring data preprocessing and cleaning procedures.

The accuracy and reliability of backtest results may be influenced by factors such as
survivorship bias, data mining bias, and model overfitting, necessitating robust
validation techniques.
The complexity and computational intensity of the algorithm may pose challenges in
terms of processing speed and scalability, requiring optimization for efficiency.

Resources

1. Pairs Trade: Definition, How Strategy Works, and Example


2. Pairs Trading: Performance of a Relative Value Arbitrage Rule
3. Introduction to Pairs Trading

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