A market neutral trading strategy enabling traders to profit from virtually any market conditions
A pairs trade relies on the fact that – if the correlation between two stocks is atleast 95% they follow a similar trend. But due to temporary market conditions like the announcement of results in a company or due to mishaps in another company, the stock direction of that company may deviate from the mean value.
Given the striking similarities between the two banks used for this capstone, a change in the business environment of one bank, affects the paired bank in a similar manner.
However because of a high correlation, the deviated stock tries to return to the mean path. Pairs trading is a market neutral strategy wherein when one stock is bought, another is sold short.
We exercise this opportunity when the stock deviates from its expected