Pairs Trading
Pairs trading is a market-neutral trading strategy that involves buying and selling two stocks simultaneously. The strategy is based on the idea that two stocks that are highly correlated will eventually return to their mean or average price. The goal of pairs trading is to capitalize on the differences in the prices of the two stocks, while minimizing the risk of the overall portfolio.
History of Pairs Trading
Pairs trading was first developed in the 1980s by a group of quantitative traders at Morgan Stanley. The strategy was initially used to take advantage of the price discrepancies between two stocks that were highly correlated. Over time, the strategy has evolved to include a variety of different trading strategies, such as statistical arbitrage, mean reversion, and momentum trading.
Today, pairs trading is used by a variety of different investors, including hedge funds, institutional investors, and individual traders. The strategy is popular because it allows investors to capitalize on the differences in the prices of two stocks, while minimizing the risk of the overall portfolio.
Comparison Table
| Strategy | Risk | Return |
|---|---|---|
| Pairs Trading | Low | Moderate |
| Statistical Arbitrage | Low | High |
| Mean Reversion | Low | Moderate |
| Momentum Trading | High | High |
Summary
Pairs trading is a market-neutral trading strategy that involves buying and selling two stocks simultaneously. The strategy is based on the idea that two stocks that are highly correlated will eventually return to their mean or average price. The goal of pairs trading is to capitalize on the differences in the prices of the two stocks, while minimizing the risk of the overall portfolio. For more information about pairs trading, you can visit Investopedia, The Balance, and other financial websites.
See Also
- Statistical Arbitrage
- Mean Reversion
- Momentum Trading
- Hedge Funds
- Institutional Investors
- Portfolio Management
- Risk Management
- Market Neutrality
- Technical Analysis
- Fundamental Analysis
