RightPairs - Statistical Arbitrage Pair Trades

Selecting Right Pairs for Pair Trades of Stocks

noreply@blogger.com (Alvin Cho) — Fri, 08 May 2009 08:48:00 +0000

We have been busy for several custom report requests and not posted Pair of the Day for two days. This info is temporarily discontinued because we are really busy. A good news is our Pair of the Day will become a portfolio that we choose 1 pair in and another out every day in near future. Another good news is our RightPairs Calculator will be redesigned to be a Windows application rather than an Excel spreadsheet.

Every clients of our custom reports have their own strategies and criteria. They tell us their specific requirement and we can generate a special report contains pairs fulfill the criteria. Some of them are asking about what a good criteria is. I have to say there are no good criteria. Everyone has his own investment style and no single strategy suits for everyone. But there are still some ways to approach profitable criteria. My opinion might not be absolutely right, but, after discussed with many pair traders, the following is some clues to a good criteria:

Trading volume: the larger provides better liquidity and less transaction cost, which is key to good result of arbitrage and pair trading.
Headlines and SEC filing: prevent stocks with recent headlines or SEC filing especially those quarterly or annual reports just announced. That might alter the NORMAL relationship and the historical price is nothing for trading.
Distance to regression line: the larger might not be better. Most farest pairs are driven by headlines and SEC filing, the distance of a good pair is usually between 1.5 to 2.5 standard deviation.
Same industries: same industries is another not so important factor because some pairs not in the same industry have high correlation and keep good relationship. If you can find pairs not in the same industries, your arbitrage opportunity should be much higher than other traders.
Correlation: it might be strange that I list correlation below some other factors. Many textbooks told us correlation is key for pair trades. I don't think a high correlation is a must to do the pair trade. A perfect correlated pair is absolutely untradable because these two instruments never separate apart. A highly correlated pair is tradable but it usually implies tiny spread even at their historical record. A reasonable range of correlation should be defined in criteria. 0.85 to 0.98 should be considered under different situations.

Defining a profitable criteria is not an easy job. We never involve in customer's decision for criteria, and some of our client's criteria have better performance than ours. Most of our clients finalize their criteria in 2 months, and we also offer 2 months free for custom reports. You can contact us if you have interests in custom report services.

Pair of the Day 2009/5/5: AMD vs INTC

noreply@blogger.com (Alvin Cho) — Wed, 06 May 2009 03:08:00 +0000

Pair: AMD (Advanced Micro Devices, Inc.) vs INTC (Intel Corporation)
Industry: Semiconductor - Broad Line
3Month Correlation: 0.9027
Distance: -2.3138 times of Standard Deviation (Negative: The first stock outperformed, Positive: The second stock outperformed)
Ratio (I1:I2): 2.0335 (in quantity)

The RightPairs Calculator is available for download.

This information is for reference only. It is automatically selected by a special criteria. I am not recommending this pair for trading. Use of this information at your own risk.

Pair of the Day 2009/5/4: CTSH vs SYNA

noreply@blogger.com (Alvin Cho) — Tue, 05 May 2009 02:43:00 +0000

Pair: CTSH (Cognizant Technology Solutions) vs SYNA (Synaptics Inc.)
Industry: Business Software & Services
3Month Correlation: 0.9131
Distance: -2.2497 times of Standard Deviation (Negative: The first stock outperformed, Positive: The second stock outperformed)
Ratio (I1:I2): 2.1082 (in quantity)

The RightPairs Calculator is available for download.

This information is for reference only. It is automatically selected by a special criteria. I am not recommending this pair for trading. Use of this information at your own risk.

Pair of the Day 2009/4/30: AMR vs CAL

noreply@blogger.com (Alvin Cho) — Fri, 01 May 2009 03:35:00 +0000

Pair: AMR (AMR Corporation) vs CAL (Continental Airlines, Inc.)
Industry: Major Airlines
3Month Correlation: 0.9425
Distance: -2.0679 times of Standard Deviation (Negative: The first stock outperformed, Positive: The second stock outperformed)
Ratio (I1:I2): 2.4297 (in quantity)

The RightPairs Calculator is available for download.

This information is for reference only. It is automatically selected by a special criteria. I am not recommending this pair for trading. Use of this information at your own risk.

Pair of the Day 2009/4/29: ICE vs VPRT

noreply@blogger.com (Alvin Cho) — Thu, 30 Apr 2009 02:51:00 +0000

Pair: ICE (IntercontinentalExchange, Inc.) vs VPRT (VistaPrint Ltd.)
Industry: Business Services
3Month Correlation: 0.9420
Distance: 2.4641 times of Standard Deviation (Negative: The first stock outperformed, Positive: The second stock outperformed)
Ratio (I1:I2): 0.2433 (in quantity)

The RightPairs Calculator is available for download.

This information is for reference only. It is automatically selected by a special criteria. I am not recommending this pair for trading. Use of this information at your own risk.

Pair of the Day 2009/4/28: HK vs XCO

noreply@blogger.com (Alvin Cho) — Wed, 29 Apr 2009 02:45:00 +0000

Pair: HK (Petrohawk Energy Corp.) vs XCO (EXCO Resources Inc.)
Industry: Independent Oil & Gas
3Month Correlation: 0.9121
Distance: -2.2212 times of Standard Deviation (Negative: The first stock outperformed, Positive: The second stock outperformed)
Ratio (I1:I2): 0.5629 (in quantity)

The RightPairs Calculator is available for download.

This information is for reference only. It is automatically selected by a special criteria. I am not recommending this pair for trading. Use of this information at your own risk.

Pair of the Day 2009/4/27: ATW vs NBR

noreply@blogger.com (Alvin Cho) — Tue, 28 Apr 2009 01:44:00 +0000

Pair: ATW (Atwood Oceanics Inc.) vs NBR (Nabors Industries Ltd.)
Industry: Oil & Gas Drilling and Exploration
3Month Correlation: 0.940251
Distance: 1.8957 times of Standard Deviation
Ratio (I1:I2): 0.712621 (in quantity)

The RightPairs Calculator is available for download.

This information is for reference only. It is automatically selected by a special criteria. I am not recommending this pair for trading. Use of this information at your own risk.

Using RiskLib.NET as backbone of RightPairs software

noreply@blogger.com (Alvin Cho) — Mon, 27 Apr 2009 16:44:00 +0000

I plan to redesign the popular RightPairs software to a more powerful calculation agent. Although it is already a multi-thread, multi-agent system and very stable, it is limited to calculation of pair-related factors such as correlations and regression lines. I think time to time about including data retrieval and delivery of reports as kinds of job like calculations. I can use SQL Agent to be the ultimate control of all jobs and my calculation agent can do any job generated by SQL Agent.

A first look of scope of namespace RiskLib.MultiAgent is at CodePlex.com

Pair of the Day 2009/4/24: ESE vs TRMB

noreply@blogger.com (Alvin Cho) — Sat, 25 Apr 2009 01:38:00 +0000

Pair: ESE (ESCO Technologies Inc.) vs TRMB (Trimble Navigation Ltd.)
Industry: Scientific and Technical Instruments
3Month Correlation: 0.912123
Distance: 2.23881 times of Standard Deviation
Ratio (I1:I2): 0.4955 (in quantity)

The RightPairs Calculator is available for download.

This information is for reference only. It is automatically selected by a special criteria. I am not recommending this pair for trading. Use of this information at your own risk.

Pair of the Day 2009/4/23: OII vs WFT

noreply@blogger.com (Alvin Cho) — Fri, 24 Apr 2009 02:09:00 +0000

Pair: OII (Oceaneering International, Inc.) vs WFT (Weatherford International Ltd.)
Industry: Oil & Gas Equipment & Services
3Month Correlation: 0.9159
Distance: 3.0413 times of Standard Deviation
Ratio (I1:I2): 0.3403 (in quantity)

The RightPairs Calculator is available for download.

This information is for reference only. It is automatically selected by a special criteria. I am not recommending this pair for trading. Use of this information at your own risk.