Pairs trading is a simple and popular relative value trading strategy. This article deals with the most common implementation of the method based on a distance criterion. It demonstrates the high sensitivity of the return to changes in the length of the formation period and shows that a...

The paper focuses on the conditions of the use of the nearest neighbors method analysing the impact of the Euclidean distance and in sample predictions, the choice of the neighbors, the number of neighbors and the distance between the neighbors.

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)...