Pairs Trading: Quantitative Methods and Analysis (Wiley Finance) by Ganapathy Vidyamurthy

Product Description

The first in-depth analysis of pairs trading
Pairs trading is a market-neutral strategy in its most simple form. The strategy involves being long (or bullish) one asset and short (or bearish) another. If properly performed, the investor will gain if the market rises or falls. Pairs Trading reveals the secrets of this rigorous quantitative analysis program to provide individuals and investment houses with the tools they need to successfully implement and profit from this proven trading methodology. Pairs Trading contains specific and tested formulas for identifying and investing in pairs, and answers important questions such as what ratio should be used to construct the pairs properly.
Ganapathy Vidyamurthy (Stamford, CT) is currently a quantitative software analyst and developer at a major New York City hedge fund.
Product Details

* Amazon Sales Rank: #195957 in Books
* Published on: 2004-08-30
* Number of items: 1
* Binding: Hardcover
* 224 pages

Editorial Reviews

Download Description
The first in-depth analysis of pairs trading
Pairs trading is a market-neutral strategy in its most simple form. The strategy involves being long (or bullish) one asset and short (or bearish) another. If properly performed, the investor will gain if the market rises or falls. Pairs Trading reveals the secrets of this rigorous quantitative analysis program to provide individuals and investment houses with the tools they need to successfully implement and profit from this proven trading methodology. Pairs Trading contains specific and tested formulas for identifying and investing in pairs, and answers important questions such as what ratio should be used to construct the pairs properly.
Ganapathy Vidyamurthy (Stamford, CT) is currently a quantitative software analyst and developer at a major New York City hedge fund.

From the Inside Flap
Pairs trading is the simplest possible example of employing a market neutral strategy. It involves the trading of securities in pairs comprised of a long position in one security and a short position in the other. If performed properly, an investor will be in the ideal position of gaining in any situation-whether the market rises or falls.

Author Ganapathy Vidyamurthy examines two versions of pairs trading that arise in the context of statistical arbitrage and risk arbitrage. He offers a compelling point of view that integrates theory and practice-providing in-depth analysis and insight in both of these cases. Issues encountered when translating theory to practice are addressed in a direct manner, arming the investment professional with the quantitative tools needed to answer key questions relating to this type of trading.

Written in an easy, accessible style, the book is a seamless blend of ideas ranging from econometrics, control theory, and operations research to core financial theories like arbitrage pricing theory and the theory of contingent claims. It is organized in three information-packed parts. Part I sets the context for the rest of the book by introducing material on key topics including time series, factor models, and Kalman filtering.

Part II of the book details statistical arbitrage pairs, a relative value arbitrage based on the premise that there is a long-run equilibrium between the prices of the stocks comprising the pair. Part III moves on to illustrate the trading techniques and strategies associated with risk arbitrage. This widely practiced arbitrage technique involves pairs trading that arises in the context of corporate events, especially mergers and acquisitions. You'll also discover why-although they are called arbitrage strategies in the industry-they are by no means risk-free.

Pairs Trading contains specific and tested formulas for identifying and investing in pairs. To further facilitate an understanding of this method, a bulleted summary highlighting key points is provided at the end of every chapter. Peppered with humor and snippets of history, Pairs Trading provides a framework for and insights on applying rigorous analysis to trading pairs in the equity markets.

From the Back Cover
Comprised of three information-packed parts, Pairs Trading presents an in-depth look at the various aspects of these strategies and provides quantitative tools to assist in their analysis. The first part of this comprehensive resource sets the context for the rest of the book by introducing preliminary material on some key topics, including time series, factor models, and Kalman filtering.

After presenting the broad ideas and concepts of this trading method, Pairs Trading delves into two different versions of pairs trading in the equity markets-statistical arbitrage pairs trading and risk arbitrage. Part II of this book details statistical arbitrage pairs trading, which is a relative value arbitrage on two securities based on the premise that there is a long-run equilibrium between the prices of the stocks comprising the pair. Part III moves on to illustrate the trading techniques and strategies associated with risk arbitrage-the widely practiced arbitrage technique that involves pairs trading arising in the context of corporate events, especially mergers and acquisitions.

Written in a straightforward and accessible style, Pairs Trading provides a framework that will allow you to boost the bottom line of any portfolio.
Customer Reviews

Very interesting material4
It's a good read even with the somewhat unorthodox mathematical notation. The overall concept of pairs trading is introduced well, with just enough detail to tempt the more adventurous gambler. The author appears well versed in the subject and writes well but assumes a relatively high level of mathematical maturity on the part of the reader.

the only good introduction to pairs trades 5
When people talk about "quant" stuff, they are generally talking about two fairly distinct kinds of quant. There are the derivatives guys (options sell side & risk hedgers), and the 'statistical arbitrage' guys. This is one of the best books for a larval 'statistical arbitrage' guy. 'Statistical arbitrage' is a term referring to the techniques used by sophisticated hedge funds and trading desks to provide 'risk free' returns. I stick in the scare quotes around these phrases, because they're not really arbitrage, though they can be pretty decoupled from market returns. The techniques go well beyond just trading pairs, so the phrase, 'stat arb' is probably with us for good, even though it is often neither stat nor arb. The mean reverting versions of these techniques were largely invented by Nunzio Tartaglia and company (primarily Gerry Bamberger according to Thorp) at Morgan Stanley in the 1980s. Many of his underlings went on to found their own hedge funds, and the secret eventually became relatively common knowledge. Boesky was one of the more famous practitioners of merger arbitrage, which is an older, related technique.

This book is a fun introduction to 'statistical arbitrage,' concentrating on the standard "mean reverting pairs" variety, and a decent explanation of merger arbitrage which he unifies with mean reverting stat arb in an interesting way. These two strategies still form the basis of a large number of high frequency techniques in one form or another. In fact, the book provides enough background material to be useful for all kinds of techniques for finding alpha; it has a very clear treatment of factor models, time series analysis (best low level one I have ever read, anywhere) and what market neutrality is and isn't. He provides a decent amount of discussion of the complexities surrounding tradeability and other practical issues that get swept under the rug in most books.

Sure, there are a lot of specific 'stat arb' techniques he doesn't mention explicitly. He doesn't talk about basket trading plays, index arbitrage, volatility arbitrage or any of the other myriad clever (and often over my head) techniques used by sophisticated fund managers to vacuum up loose change that dumb people leave on the street. So what? Vidyamurthy gives you enough material you can go out and learn the practical details of real strategies on your own. If you're gifted enough, you can go figure them out (and more) for yourself once you understand the material in the book: they're mostly variations on these themes. Why should Vidyamurthy give away the keys to the kingdom for $100? Be happy he wrote the book at all. Presumably, he makes a living actually doing 'stat arb' type things, and his motivation was to have a book to give to his underlings so he didn't have to explain GARCH and cointegration to someone who breathes out of his mouth for the 9,000th time.

Anyone who can't read this book simply doesn't have the intellectual horsepower or attention span to do this kind of trading. The book is almost excruciatingly clear, it is very short, and even does the MBA's the favor of tucking the scary mathematics involving matrices and standard deviations safely away in chapter appendices. I mean, it even has cartoons and funny anecdotes (which are actually very funny: I detect a Wodehouse fan in Vidyamurthy). You have to actually pay attention while you read, and some sections, you may have to read twice. The concepts will not leap off the page and embed themselves into your frontal lobes, but it really isn't that difficult for any intelligent person to understand. I can think of no better introduction to pairs trading, or general alpha quant type stuff than this book. It should probably be on every wannabe quant or trader's desk if it isn't already etched into the fiber of their being.

Covers the right stuff but poorly written2
I was looking for books on stat arb and risk arb and was surprised that not many titles showed up for my search on Amazon. I eventually bought this book (a used copy) and although the book covers exactly the kind of stuff you want to learn about pairs trading, the writing is very poor and there are way too many places where the sentences don't make any sense, regardless of your math/stat background. This book is not a how-to book. It's a general treatise and not a good one at that. I cannot recommend this book. You may want to check out Tsay's financial time series analysis book which, although not specifically for pairs trading, has all the essential materials.