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Department of Applied Finance and Actuarial Studies

Keith Godfrey Seminar

Research Seminars - business and economics
  • Topic: Detecting Pairs Trading (or any Related Trading) in Two Financial Securities
  • Speaker:

    Keith Godfrey, Assistant Professor, Accounting and Finance, The University of Western Australia

  • Venue:E4A 623
  • When: 21st March, 2014, (Fri)
  • Time: 11am - 12pm (Morning Tea from 10.30am)

Market-neutral strategies such as pairs trading and merger arbitrage have become increasingly important over the past few decades, yet the literature on them is relatively undeveloped. There are simulation studies which imply theoretical profits, but little empirical work has been done on the actual trading because it is so difficult when trades are anonymous. I describe a technique of "time difference analysis" for studying financial data which is complementary to "time series analysis" and enables empirical inference of pairs trading in two securities. Related trading indicators are computed by analyzing the distribution functions of the time differences between trades, and performance is confirmed by identifying pairs traded from amongst large random sets. Applications of this approach may include searching for traded pairs, inference of dominant trading strategies, day-by-day investigations of merger arbitrage, and studies of rollovers in futures and options.

View the full paper on "Detecting Pairs Trading (or any Related Trading) in Two Financial Securities" (PDF)


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