Mining Pairs-Trading Patterns: A Framework

Pairs trading is an investment strategy that depends on the price divergence between a pair of stocks. Essentially, this strategy involves choosing a pair of stocks that historically move together, then taking a long-short position if the pair’s prices diverge, and finally reversing the previous position when prices converge. The rationale of the pairs trading is to make a profit and avoid market risk. This review focuses on presenting researchers with the state-of-the-art techniques used in finding pairs trading. In addition, it shows the most important key issues that researchers need to consider while investigating or studying the financial data in finding pairs.