pairs trade

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Pairs Trade

An investment strategy in which one owns two stocks in the same industry. In general, these stocks follow the same pattern; that is, both go up or both go down. When the pattern diverges (that is, when one increases in price and the other decreases), the investor sells the stock that has increased and buys the stock that has decreased. The idea behind a pairs trade is that the stocks will generally meet back in the middle, allowing the investor to profit from the purchase of the stock that had decreased and the sale of the one that had increased.

pairs trade

An investment strategy that matches a short position with a comparable long position in the stock of a company in the same industry. For example, an investor might buy 500 shares of Delta Airlines and sell short a comparable principal amount of the stock of UAL, Inc. The offsetting positions allow an investor to attempt to profit by selecting the best value in an industry without worrying about changes in the valuation of the sector or the overall market.
References in periodicals archive ?
In this paper, we investigate the risk and return of a portfolio consisting of many pairs trades all selected based on cointegration.
4) Since we deal with many pairs trades simultaneously, there is the possibility of having a trade where stock A is sold short, and another trade where we buy stock A.
Pairs trades, a market neutral strategy which matches a long position with a short position in two stocks of the same sector, creates a hedge against the overall market as the investor bets solely on the gap between the performance of the two stocks.
The algo, first announced by BAML in June, enables clients to execute US equity pairs trades.
Pairs trades were developed in the late 1980s by quantitative analysts and help hedge sector - and market risk.
In addition, FlexSpread allows buy-side traders to execute pairs strategies, cross-currency equity pairs trades and risk arbitrage to trade in response to a takeover deal.