Derek Crookes: ◦ Basic introduction to pairs Trading Jonathan Roche: ◦ Highlights of a Pairs Trading Case Study ◦ Searching for pairs – some tools and methodologies ◦ Tracking Pairs – what is involved ◦ Thoughts on what one needs to trade pairs successfully
Trading is risky This may not be suitable for you It is your responsibility what you decide to do with your trading SO this presentation does not contain nor should be construed as investment advice or an investment recommendation
‘Pairs Trading’ is an investment strategy used by many Hedge Funds. Pairs trading or statistical arbitrage was first developed and put into practice by Nunzio Tartaglia, while working for Morgan Stanley in the 1980s. Pairs trading was one of the most profitable strategies that was developed by his team which gradually spread to other firms.
Asset Arbitrage Merger Arbitrage Spread Trades Spread Inversion Double Alpha Trades Differential Risk Arbitrage Co-Integration Correlation Ratios Relative value Co-Variance Mean Reverting – return to the Average
Trading Pairs – Mark Whistler Statistical Arbitrage – Andrew Pole Pairs Trading – Ganapathy Vidyamurthy 3 rd Party Price feed into excel Don’t rely on statistics, or patterns etc, only
The general 'rule of thumb' is to sell overvalued securities and buy undervalued ones. It is only possible to determine that a security is overvalued or undervalued if the true value of the security is known. Pairs trading is about relative pricing, so that the true value of the security is not important. Relative pricing is based on the idea that securities with similar characteristics should be priced more or less the same. When prices of two similar securities are different, one security is overpriced with respect to its 'true value' or the other one under-priced or both.
Long 1 stock and short another stock, generally in the same sector Eg. IMP vs AMS (Mining – Platinum) Why do we do this – Trade a Pair? Reason: Are you able to determine when the market is going up/down? Determine a mispricing between 2 securities to reduce your risk, this is not risk free
Same sector instruments Quick eye ball – overlay the instruments return over the last year or 2 Calculate the relative value – divide the 2 instruments closing prices Calculate average to determine the relative value(ratio) to the mean – looking at convergence, divergence What MA do we use? Determine Std Deviation to enter into a trade with the highest probability of a positive return – Mispricing opportunity Determine the strategy
Long Ned vs Short Std Bank Both instruments must have the same notional value Notional value / price = shares Ned: / = 513 (rounded) Sbk: / = 806 (rounded) Nedbank price increases to Sbk price increases to
Margin – 10% (R10 000) ROWC – 50% rounded
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Trading for 10 years 4 Children and Wife Bsc Mech Eng MBA U of CT This is all he does!