Ganapathy Vidyamurthy – Pairs Trading: Quantitative Methods & Analysis

The first in-depth analysis of pairs trading Pairs trading is a market-neutral strategy in its most simple form. The strategy involves being long (or bullish) one asset and short (or bearish) another. If properly performed, the investor will gain if the market rises or falls. Pairs Trading reveals the secrets of this rigorous quantitative analysis program to provide individuals and investment houses with the tools they need to successfully implement and profit from this proven trading methodology. Pairs Trading contains specific and tested formulas for identifying and investing in pairs, and answers important questions such as what ratio should be used to construct the pairs properly. Ganapathy Vidyamurthy (Stamford, CT) is currently a quantitative software analyst and developer at a major New York City hedge fund.

• Preface.
• Acknowledgments.
• PART ONE: BACKGROUND MATERIAL.
• Chapter 1. Introduction.
• The CAPM Model.
• Market Neutral Strategy.
• Outline.
• Audience.
• Chapter 2. Time Series.
• Overview.
• Autocorrelation.
• Time Series Models.
• Forecasting.
• Goodness of Fit versus Bias.
• Model Choice.
• Modeling Stock Prices.
• Chapter 3. Factor Models.
• Introduction.
• Arbitrage Pricing Theory.
• The Covariance Matrix.
• Application: Calculating the Risk on a Portfolio.
• Application: Calculation of Portfolio Beta.
• Sensitivity Analysis.
• Chapter 4. Kalman Filtering.
• Introduction.
• The Kalman Filter.
• The Scalar Kalman Filter.
• Filtering the Random Walk.
• Application: Example with the Standard & Poor Index.
• PART TWO: STATISTICAL ARBITRAGE.
• Chapter 5. Overview.
• History.
• Motivation.
• Cointegration.
• Applying the Model.
• Road Map for Strategy Design.
• Chapter 6. Pairs Selection in Equity Markets.
• Introduction.
• Common Trends Cointegration Model.
• Common Trends Model and APT.
• The Distance Measure.
• Interpreting the Distance Measure.
• Reconciling Theory and Practice.
• Chapter 7. Testing for Tradability.
• Introduction.
• The Linear Relationship.
• Estimating the Linear Relationship: The Multifactor Approach.
• Estimating the Linear Relationship: The Regression Approach.
• Introduction.
• Band Design for White Noise.
• Nonparametric Approach.
• Regularization.
• Tying Up Loose Ends.
• PART THREE: RISK ARBITRAGE PAIRS.
• Chapter 9. Risk Arbitrage Mechanics.
• Introduction.
• History.
• The Deal Process.
• Transaction Terms.
• Quantitative Aspects.
• Introduction.
• Specifying the Order.
• Verifying the Execution.
• Execution During the Pricing Period.
• Short Selling.
• Chapter 11. The Market Implied Merger Probability.
• Introduction.
• Implied Probabilities and Arrow-Debreu Theory.
• The Single-Step Model.
• The Multistep Model.
• Reconciling Theory and Practice.
• Risk Management.
• Introduction.
• The Prediction Equation.
• The Observation Equation.
• Applying the Kalman Filter.
• Model Selection.
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