Pairs Trading and Spreading
Overview
Pairs trading is a trading strategy that buys assets in pairs. This can be done for different reasons.
- Spread trading is when a trader identifies a relationship between two assets which appears to be temporarily mispriced,
which leads the trader to buy the underpriced asset and sell the overpriced asset.
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Hedging occurs when the trader wants to buy an asset because of a mispricing in the targeted asset, but the trader wants to hedge
out risk factors in the position that are unrelated to the mispricing. As an example, a trader may want to buy a bank she thinks is
undervalued, but wants to hedge out market risk, so she concurrently sells a market index, most likely a banking index.
Trade Models
