TY - JOUR T1 - Pairs Trading with Copulas JF - The Journal of Trading SP - 41 LP - 52 DO - 10.3905/jot.2016.11.3.041 VL - 11 IS - 3 AU - Wenjun Xie AU - Rong Qi Liew AU - Yuan Wu AU - Xi Zou Y1 - 2016/06/30 UR - https://pm-research.com/content/11/3/41.abstract N2 - Pairs trading is a well-known speculative investment strategy, with the distance method the most commonly implemented variation. However, the profitability of this approach has decreased in recent years. This article seeks to generalize the pairs trading strategy using a copula technique to explicitly capture the marginal distributions as well as the dependency structure between the stock returns. With a better understanding of the joint distribution of the two stocks, practitioners could gain preferential entry positions and have more trading opportunities. The overall empirical results verify the proposed strategy’s ability to generate higher profits compared with the conventional distance method.TOPICS: Statistical methods, security analysis and valuation ER -