Pairs trading and outranking: The multi-step-ahead forecasting case |
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Authors: | Nicolas Huck |
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Affiliation: | ESSCA School of Management, 1, Rue Lakanal, 49003 Angers Cedex 01, France |
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Abstract: | 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. |
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Keywords: | Finance Pairs trading Multi-criteria decision-aiding Electre III Multi-step-ahead forecasting |
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