Research in High Frequency Trading and Pairs Selection Algorithm with Baltic Region Stocks
Pair trading is a popular strategy where a profit arises from pricing inefficiencies between stocks. The idea is simple: find two stocks that move together and take long/short positions when they diverge abnormally, hoping that the prices will converge in the future. During last few years high frequency trading in milliseconds or nanoseconds has drawn attention of not only to financial players but and to researchers and engineers. The main objective of this research is to check three different statistical arbitrage strategies using high frequency trading with 14 OMX Baltic market stocks and measure their efficiency and risks. One strategy used in this paper was first implemented by M.S Perlini, the other one by J.F. Caldeira and G.V. Moura and the last one was presented by D. Herlemont. Together with the strategies a pair selecting algorithm was presented. All three strategies were modified in order to be able to work with high frequency data. At the end of the research strategies where measured accordingly to the profit they did generate.
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