Pairs Trading with Robust Correlation by Jieren Wang AN ESSAY SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE
نویسنده
چکیده
This essay compares the performance of two types of correlation measures in triggering trades in a pairs trading application in the presence of high-frequency stock prices. One correlation measure is the commonly-used Pearson correlation and the other is a robust correlation measure called Maronna correlation. These correlation measures are used to define three methods of initiating trades – called trigger mechanisms – and the characteristics of these mechanisms. We test the relative performance of trading strategies using three types of triggering mechanisms on historical data and perform statistical tests based on these results. We find that trading strategies based on trigger mechanisms which employ robust measures of correlation yield consistently lower returns but more favorable risk characteristics.
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