Journal of the Korean Operations Research and Management Science Society (한국경영과학회지)

The Korean Operations Research and Management Science Society (한국경영과학회)
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Performance of Pairs Trading Algorithm with the Implementation of Structural Changes Detection Procedure

구조적 변화 감지 과정이 포함된 페어트레이딩 알고리즘의 성과분석

  • 정인곤 (교보 악사 자산 운용) ;
  • 박대근 (차의과학대학교 데이터경영학과) ;
  • 전덕빈 (한국과학기술원 경영대학원)
  • Received : 2016.11.07
  • Accepted : 2017.07.11
  • Published : 2017.08.31
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Abstract

This paper aims to implement "structural changes detection procedure" in pairs trading algorithm and to show that the proposed approach outperforms the extant pair trading algorithm. Structural changes in pairs trading are defined in terms of changes in cointegrating factors and broken cointegration relationship. These changes are designed to test extant structural changes and unit root test methodologies. The simulation finds that expanding the changes in structure, increasing the mean reverting process of spread, and extending the consecutive days of broken cointegration will increase the performances of the proposed algorithm. Empirical study results are also consistent those of the simulation studies. The proposed algorithm outperforms the extant algorithm relative to risk and return given that the cumulative profit/loss has a significant upward-slope with minimal variance.

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References

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