Enhancing Pairs Trading with Adaptive Pair Rotation Strategies in Volatile Markets
Received: 5 April 2025 | Revised: 23 April 2025 | Accepted: 27 April 2025 | Online: 2 August 2025
Corresponding author: Pranjala G. Kolapwar
Abstract
Pair trading strategies have long been utilized to capitalize on mispricing between correlated assets. However, traditional approaches often struggle to adapt to dynamic market conditions, resulting in suboptimal outcomes. In today's fast-paced financial markets, there is a growing need for strategies that deliver higher returns in shorter time frames. This paper presents an innovative adaptive pair rotation strategy that enhances financial decision-making through continuous evaluation and dynamic adjustments. The strategy is implemented in two stages: the first involves selecting stock pairs based on return-based correlation and ranking them by cointegration, and, the second applies adaptive methods to dynamically re-rank the pairs. By continuously adapting to market changes, the proposed approach ensures robustness and responsiveness in volatile financial environments. Empirical results demonstrate that this adaptive strategy yields more consistent and superior returns compared to traditional static methods, representing a significant advancement in trading strategies and financial engineering.
Keywords:
pair trading, dynamic pair selection, adaptive pair rotation, financial market adaptability, market adaptation, cointegration ranking, returns maximization, volatile marketDownloads
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