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Simulated Trading-An Analysis of Pairs Trading

Author

Listed:
  • Nikesh Agarwal

    (Stockholm School of Economics)

  • Vikash Madhogaria

    (Stockholm School of Economics)

  • Supreena Narayanan

    (Stockholm School of Economics)

Abstract

In this report, we explain and analyze a trading strategy, popularly known as Pairs trading. We begin by explaining what a pair trading strategy entails. Since there are various ways of implementing the strategy, we describe the methodology selected by us in section 3. Thereafter, we look at the returns from the strategy and benchmark it to the S&P 500 index in Section 4. In section 5, we examine the risks involved in pairs trading. Section 6 looks at some of the limitations we faced while trading and Section 7 points out some mistakes we made. Finally, we discuss some risk control measures in Section 8 and conclude in Section 9 with comments on whether we would implement the strategy in real life and if so, with what changes.

Suggested Citation

  • Nikesh Agarwal & Vikash Madhogaria & Supreena Narayanan, 2004. "Simulated Trading-An Analysis of Pairs Trading," Finance 0412018, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpfi:0412018
    Note: Type of Document - pdf; pages: 15
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0412/0412018.pdf
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    JEL classification:

    • G - Financial Economics

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