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Pairs Trading via Three-Regime Threshold Autoregressive GARCH Models

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Modeling Dependence in Econometrics

Part of the book series: Advances in Intelligent Systems and Computing ((AISC,volume 251))

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.

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Author information

Authors and Affiliations

  1. Department of Statistics, Feng Chia University, Taichung, Taiwan

    Cathy W. S. Chen & Shu-Yu Chen

  2. Department of Finance, Ming Chuan University, Guishan, Taiwan

    Max Chen

Authors
  1. Cathy W. S. Chen
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  2. Max Chen
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  3. Shu-Yu Chen
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Corresponding author

Correspondence to Cathy W. S. Chen .

Editor information

Editors and Affiliations

  1. APAN Advanced Institute of Science and Technology, Ishikawa, Japan

    Van-Nam Huynh

  2. Department of Computer Science, University of Texas at El Paso, El Paso, Texas, USA

    Vladik Kreinovich

  3. Faculty of Economics, Chiangmai University, Chiangmai, Thailand

    Songsak Sriboonchitta

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© 2014 Springer International Publishing Switzerland

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Chen, C.W.S., Chen, M., Chen, SY. (2014). Pairs Trading via Three-Regime Threshold Autoregressive GARCH Models. In: Huynh, VN., Kreinovich, V., Sriboonchitta, S. (eds) Modeling Dependence in Econometrics. Advances in Intelligent Systems and Computing, vol 251. Springer, Cham. https://doi.org/10.1007/978-3-319-03395-2_8

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  • DOI: https://doi.org/10.1007/978-3-319-03395-2_8

  • Publisher Name: Springer, Cham

  • Print ISBN: 978-3-319-03394-5

  • Online ISBN: 978-3-319-03395-2

  • eBook Packages: EngineeringEngineering (R0)

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