Anti-Persistent Values of the Hurst Exponent Anticipate Mean Reversion in Pairs Trading: The Cryptocurrencies Market as a Case Study
Pairs trading is a short-term speculation trading strategy based on matching a long position with a short position in two assets in the hope that their prices will return to their historical equilibrium. In this paper, we focus on identifying opportunities where mean reversion will happen quickly, a...
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MDPI AG
2024-09-01
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| author | Mar Grande Florentino Borondo Juan Carlos Losada Javier Borondo |
| author_facet | Mar Grande Florentino Borondo Juan Carlos Losada Javier Borondo |
| author_sort | Mar Grande |
| collection | DOAJ |
| description | Pairs trading is a short-term speculation trading strategy based on matching a long position with a short position in two assets in the hope that their prices will return to their historical equilibrium. In this paper, we focus on identifying opportunities where mean reversion will happen quickly, as the commission costs associated with keeping the positions open for an extended period of time can eliminate excess returns. To this end, we propose the use of the local Hurst exponent as a signal to open trades in the cryptocurrencies market. We conduct a natural experiment to show that the spread of pairs with anti-persistent values of Hurst revert to their mean significantly faster. Next, we verify that this effect is universal across pairs with different levels of co-movement. Finally, we back-test several pairs trading strategies that include <inline-formula><math xmlns="http://www.w3.org/1998/Math/MathML" display="inline"><semantics><mrow><mi>H</mi><mo><</mo><mn>0.5</mn></mrow></semantics></math></inline-formula> as an indicator and check that all of them result in profits. Hence, we conclude that the Hurst exponent represents a meaningful indicator to detect pairs trading opportunities in the cryptocurrencies market. |
| format | Article |
| id | doaj-art-ae50fbe998aa4d58be1925d651ebe0bc |
| institution | OA Journals |
| issn | 2227-7390 |
| language | English |
| publishDate | 2024-09-01 |
| publisher | MDPI AG |
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| series | Mathematics |
| spelling | doaj-art-ae50fbe998aa4d58be1925d651ebe0bc2025-08-20T01:55:38ZengMDPI AGMathematics2227-73902024-09-011218291110.3390/math12182911Anti-Persistent Values of the Hurst Exponent Anticipate Mean Reversion in Pairs Trading: The Cryptocurrencies Market as a Case StudyMar Grande0Florentino Borondo1Juan Carlos Losada2Javier Borondo3Grupo de Sistemas Complejos, Universidad Politécnica de Madrid, Av Puerta de Hierro 2, 28040 Madrid, SpainDepartamento de Química, Universidad Autónoma de Madrid, Cantoblanco, 28049 Madrid, SpainGrupo de Sistemas Complejos, Universidad Politécnica de Madrid, Av Puerta de Hierro 2, 28040 Madrid, SpainAGrowingData, 04001 Almería, SpainPairs trading is a short-term speculation trading strategy based on matching a long position with a short position in two assets in the hope that their prices will return to their historical equilibrium. In this paper, we focus on identifying opportunities where mean reversion will happen quickly, as the commission costs associated with keeping the positions open for an extended period of time can eliminate excess returns. To this end, we propose the use of the local Hurst exponent as a signal to open trades in the cryptocurrencies market. We conduct a natural experiment to show that the spread of pairs with anti-persistent values of Hurst revert to their mean significantly faster. Next, we verify that this effect is universal across pairs with different levels of co-movement. Finally, we back-test several pairs trading strategies that include <inline-formula><math xmlns="http://www.w3.org/1998/Math/MathML" display="inline"><semantics><mrow><mi>H</mi><mo><</mo><mn>0.5</mn></mrow></semantics></math></inline-formula> as an indicator and check that all of them result in profits. Hence, we conclude that the Hurst exponent represents a meaningful indicator to detect pairs trading opportunities in the cryptocurrencies market.https://www.mdpi.com/2227-7390/12/18/2911pairs tradingefficient markettime seriescryptocurrenciesHurstprices |
| spellingShingle | Mar Grande Florentino Borondo Juan Carlos Losada Javier Borondo Anti-Persistent Values of the Hurst Exponent Anticipate Mean Reversion in Pairs Trading: The Cryptocurrencies Market as a Case Study Mathematics pairs trading efficient market time series cryptocurrencies Hurst prices |
| title | Anti-Persistent Values of the Hurst Exponent Anticipate Mean Reversion in Pairs Trading: The Cryptocurrencies Market as a Case Study |
| title_full | Anti-Persistent Values of the Hurst Exponent Anticipate Mean Reversion in Pairs Trading: The Cryptocurrencies Market as a Case Study |
| title_fullStr | Anti-Persistent Values of the Hurst Exponent Anticipate Mean Reversion in Pairs Trading: The Cryptocurrencies Market as a Case Study |
| title_full_unstemmed | Anti-Persistent Values of the Hurst Exponent Anticipate Mean Reversion in Pairs Trading: The Cryptocurrencies Market as a Case Study |
| title_short | Anti-Persistent Values of the Hurst Exponent Anticipate Mean Reversion in Pairs Trading: The Cryptocurrencies Market as a Case Study |
| title_sort | anti persistent values of the hurst exponent anticipate mean reversion in pairs trading the cryptocurrencies market as a case study |
| topic | pairs trading efficient market time series cryptocurrencies Hurst prices |
| url | https://www.mdpi.com/2227-7390/12/18/2911 |
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