BYU

Abstract by Christian Davis

Personal Infomation


Presenter's Name

Christian Davis

Co-Presenters

None

Degree Level

Masters

Co-Authors

None

Abstract Infomation


Department

Statistics

Faculty Advisor

Matthew Heaton

Title

Pairs Trading: Finding the Optimal Value of k

Abstract

Pairs trading is a stock market arbitrage technique that seeks to profit on market deviations of two correlated stocks.  These market deviations are quantified by the number of standard deviations, k, away from the historical ratio of the selected stocks.  When the ratio deviates far enough away from its historical average, an opportunity is presented to make money. We will determine a way to find the optimal value of k to maximize profits. Additionally, using Monte Carlo simulation studies, we will evaluate the effect of correlation on finding the optimal k and also determine the effect of correlation on profits. Using the information we gathered from the simulation study, we will assess how our technique performs in a real-world example.