Investigating Returns to Pairs Trading Strategies

Citadel Investment Group Mathematics, 2007-08

Liaison(s): Russ Osborn’06, Mike Schubmehl ’02
Advisor(s): Andrew Bernoff
Students(s): Asaf Bernstein (PM), Jason Fennell, Patrick Foley, Zachary Rogstad, Kenn Tevin

The Clinic team investigated pairs trading, a quantitive investment strategy that identifies and exploits highly-correlated stock pairs to produce a high profit-to-risk ratio. The team designed software to automate testing of this strategy allowing them to reproduce results in the academic literature and investigate the driving factors behind a previously documented trading rule. They identified how sensitive the existing method is to a variety of parameters and have suggested strategies for optimizing the returns along with fertile areas for further investigation.