Pairs Trading via Three-Regime Threshold Autoregressive GARCH Models
- LecturerDr. Max Chen (Department of Finance, Ming Chuan University)
Host: Jan-Ming Ho - Time2014-07-25 (Fri.) 10:00 ~ 12:00
- LocationAuditorium 106 at new IIS Building
Abstract
Pairs trading is a popular strategy on Wall Street. Most pairs trading strategies are based on a minimum distance approach or cointegration method. In this paper, we propose an alternative model to the process of pair return spread. Specifically, we model the return spread of potential stock pairs as a three-regime threshold autoregressive model with GARCH effects (TAR-GARCH), and the upper and lower regimes in the model are used as trading entry and exit signals. An application to the Dow Jones Industrial Average Index stocks is presented.