World Famous Comics: Pairs Trading: Quantitative Methods and Analysis (Wiley Finance)
Pairs Trading: Quantitative Methods and Analysis (Wiley Finance)
By: Ganapathy Vidyamurthy Publisher: Wiley Average Rating: Binding: Hardcover Label: Wiley Number of Items: 1 Number of Pages: 224 Publication Date: August 30, 2004
Product Description: The first in-depth analysis of pairs trading Pairs trading is a market-neutral strategy in its most simple form. The strategy involves being long (or bullish) one asset and short (or bearish) another. If properly performed, the investor will gain if the market rises or falls. Pairs Trading reveals the secrets of this rigorous quantitative analysis program to provide individuals and investment houses with the tools they need to successfully implement and profit from this proven trading methodology. Pairs Trading contains specific and tested formulas for identifying and investing in pairs, and answers important questions such as what ratio should be used to construct the pairs properly. Ganapathy Vidyamurthy (Stamford, CT) is currently a quantitative software analyst and developer at a major New York City hedge fund.
Best quant+trading book I've read This book is for the analytically inclined and only for the analytically inclined. It's perfectly suitable for wanna-be quants (possible engineering or science graduates) who want to familirize themselves with techniques of quantitative finance.
The author does an admirable job of surveying scientific subjects relevant, or central, to pairs trading. But, it's hard to say he's an expert in all of them. He misses the mark a couple of times, notably in the section on Kalman filtering with regard to standard terminology in this area.
The book contains excellent pointers to the well known references and sources in this area, and can provide a suitable starting point (+ it provides very valuable intuitions on how to relate abstract math concepts to trading). I thought it's much more readable than a more established reference "Active Portfolio Management".
If it were a science book, there is no way I would give it five stars. But, it almost shines as a quant/trading book---again only for those with sufficient math/signal processing/systems theory background and for those willing to learn deeper from references.
good book there is a scarcity of books in this category.. It is not the best comprehensive book on the topic but the presentation is very good and easy for a beginner to understand.
My 2 cents The reviewers up to this point have all made valid points. I just want to add that this book IS NOT worth $50. $15 maybe $20. It's a paltry 204 pages filled with graphs and cartoons. Check it out from your local research library and make notes. You can read through it in a matter of weeks if not days if you have a lot of free time on your hands.
Very interesting material It's a good read even with the somewhat unorthodox mathematical notation. The overall concept of pairs trading is introduced well, with just enough detail to tempt the more adventurous gambler. The author appears well versed in the subject and writes well but assumes a relatively high level of mathematical maturity on the part of the reader.
the only good introduction to pairs trades When people talk about "quant" stuff, they are generally talking about two fairly distinct kinds of quant. There are the derivatives guys (options sell side & risk hedgers), and the 'statistical arbitrage' guys. This is one of the best books for a larval 'statistical arbitrage' guy. 'Statistical arbitrage' is a term referring to the techniques used by sophisticated hedge funds and trading desks to provide 'risk free' returns. I stick in the scare quotes around these phrases, because they're not really arbitrage, though they can be pretty decoupled from market returns. The techniques go well beyond just trading pairs, so the phrase, 'stat arb' is probably with us for good, even though it is often neither stat nor arb. The mean reverting versions of these techniques were largely invented by Nunzio Tartaglia and company (primarily Gerry Bamberger according to Thorp) at Morgan Stanley in the 1980s. Many of his underlings went on to found their own hedge funds, and the secret eventually became relatively common knowledge. Boesky was one of the more famous practitioners of merger arbitrage, which is an older, related technique.
This book is a fun introduction to 'statistical arbitrage,' concentrating on the standard "mean reverting pairs" variety, and a decent explanation of merger arbitrage which he unifies with mean reverting stat arb in an interesting way. These two strategies still form the basis of a large number of high frequency techniques in one form or another. In fact, the book provides enough background material to be useful for all kinds of techniques for finding alpha; it has a very clear treatment of factor models, time series analysis (best low level one I have ever read, anywhere) and what market neutrality is and isn't. He provides a decent amount of discussion of the complexities surrounding tradeability and other practical issues that get swept under the rug in most books.
Sure, there are a lot of specific 'stat arb' techniques he doesn't mention explicitly. He doesn't talk about basket trading plays, index arbitrage, volatility arbitrage or any of the other myriad clever (and often over my head) techniques used by sophisticated fund managers to vacuum up loose change that dumb people leave on the street. So what? Vidyamurthy gives you enough material you can go out and learn the practical details of real strategies on your own. If you're gifted enough, you can go figure them out (and more) for yourself once you understand the material in the book: they're mostly variations on these themes. Why should Vidyamurthy give away the keys to the kingdom for $100? Be happy he wrote the book at all. Presumably, he makes a living actually doing 'stat arb' type things, and his motivation was to have a book to give to his underlings so he didn't have to explain GARCH and cointegration to someone who breathes out of his mouth for the 9,000th time.
Anyone who can't read this book simply doesn't have the intellectual horsepower or attention span to do this kind of trading. The book is almost excruciatingly clear, it is very short, and even does the MBA's the favor of tucking the scary mathematics involving matrices and standard deviations safely away in chapter appendices. I mean, it even has cartoons and funny anecdotes (which are actually very funny: I detect a Wodehouse fan in Vidyamurthy). You have to actually pay attention while you read, and some sections, you may have to read twice. The concepts will not leap off the page and embed themselves into your frontal lobes, but it really isn't that difficult for any intelligent person to understand. I can think of no better introduction to pairs trading, or general alpha quant type stuff than this book. It should probably be on every wannabe quant or trader's desk if it isn't already etched into the fiber of their being.
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