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Investigation of multivariate pairs trading under copula approach with mixture distribution

Published: 01 July 2024 Publication History

Abstract

Pairs trading is typically implemented using two assets. The copula approach can allow us to consider the dependency among multiple assets and use multivariate pairs in this strategy. The goal of this article is to investigate this strategy under the copula approach for a group of assets that have mixture distributions. Increasing the consideration of multivariate pairs, especially in the trivariate case, enhances the amount of dependent information. In fact, the results show that multivariate pairs increase trading opportunities. Computational pieces of evidence are brought forward to support the proposed algorithm of this work.

Highlights

We discuss traditional pairs trading by enabling the use of multivariate pairs in the trading strategy.
Using copula functions, we extract joint distributions, enabling direct calculation of the joint probability for each pair of data observations in the trading strategy.
Computational evidence with mixture marginal distributions supports the applicability of the proposed algorithm.

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Published In

cover image Applied Mathematics and Computation
Applied Mathematics and Computation  Volume 472, Issue C
Jul 2024
291 pages

Publisher

Elsevier Science Inc.

United States

Publication History

Published: 01 July 2024

Author Tag

  1. C15

Author Tags

  1. 91B60
  2. 62H05

Author Tags

  1. Marginal distributions
  2. Pairs trading strategy
  3. Multivariate pairs
  4. Copula
  5. Mixture distribution

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