Journal
EUROPEAN JOURNAL OF OPERATIONAL RESEARCH
Volume 207, Issue 3, Pages 1702-1716Publisher
ELSEVIER
DOI: 10.1016/j.ejor.2010.06.043
Keywords
Finance; Pairs trading; Multi-criteria decision-aiding; Electre III; Multi-step-ahead forecasting
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Pairs trading is a popular speculation strategy. Several implementation methods are proposed in the literature: they can be based on a distance criterion or on co-integration. This article extends previous research in another direction: the combination of forecasting techniques (Neural Networks) and multi-criteria decision making methods (Electre III). The key contribution of this paper is the introduction of multi-step-ahead forecasts. It leads to major changes in the trading system and raises new empirical and methodological questions. The results of an application based on S&P 100 Index stocks are promising: this methodology could be a powerful tool for pairs selection in a highly non-linear environment. (C) 2010 Elsevier B.V. All rights reserved.
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