Optimizing Pairs Trading Portfolios

Citadel Investment Group Mathematics, 2008-09

Liaison(s): Michael Schubmehl ’02
Advisor(s): Francis Su
Students(s): Brett Cooper (PM-S), Chris Fox, Denis Aleshin (J), Joshua Klontz (J), Bryce Lampe (J), Maria Pavloskaia (PM-F)

We studied a method of statistical arbitrage known as pairs trading, and developed an automated strategy for quantitatively constructing a portfolio of pairs that attempts to minimize risk while maximizing expected returns. Our work builds on the research done by the 2007-2008 Pairs Trading Clinic Team. While last year’s focus was to implement a basic pairs trading strategy and optimize parameters, this year’s emphasis is on controlling risk.