Python Code for Strategy #17: Pairs Trading/Statistical Arbitrage with 12-Month Formation Periods

"Strategy #17: Pairs Trading/Statistical Arbitrage with 12-Month Formation Periods" - A Deep Dive into Pairs Trading Research

This piece of research is an intricate exploration into the realms of pairs trading and statistical arbitrage, with a focus on the utilization of the sum of squared deviations methodology. Published initially in 1998, this research elucidates one of the nuanced strategies employed in statistical arbitrage and serves as one segment in an ongoing series of research publications.

Crucial Elements Explored:

• Pairs Formation Periods: An analytical review of various pairs formation periods, examining the rationale and statistical relevance in the context of a robust trading strategy.
• Minimization Sum of Squared Deviations: An in-depth analysis of employing the minimization sum of squared deviations within the pairs trading framework, aiming to decipher its empirical applicability and efficacy.
• Revisiting the Original Test: A critical evaluation of the original tests and methodologies, identifying potential drawbacks and exploring alternative or complementary approaches.

Through this research:

• We'll delve into historical data, scrutinizing how pairs were selected based on certain predefined criteria and the statistical properties that were deemed significant during the formation period.
• Analyze strategies centering around minimizing the sum of squared deviations, understanding the theoretical underpinning, and exploring practical applications and possible limitations in real-world trading scenarios.
• Explore potential flaws or limitations in the original test and discuss alternative approaches or additional factors that might enhance the robustness of the strategy.

As a standalone piece, this research contributes to a broader series that seeks to dissect, explore, and critically evaluate various strategies deployed within the trading domain, especially in the sphere of statistical arbitrage. It’s designed to cater to both seasoned traders and those newly venturing into the world of pairs trading, providing insightful data and analyses that could inform and refine trading strategy development.

Note: Engaging in pairs trading and statistical arbitrage involves substantial risk and is not suitable for every investor. The research provided does not constitute trading advice but rather an in-depth analysis of the strategy.