MN5443 Group Coursework – Statistical Arbitrage Pair Trading using Cointegration

Your group needs to identify a pair of financial securities of your choice that exhibits
cointegration, form a statistical arbitrage pair trading strategy, and evaluate its
performance.
Your group will write a report that contains (but not limit to) the following:
 Introduction
 A review of statistical arbitrage pairs trading
 An introduction of cointegration-based pairs trading
 Selection of the pair of securities
 Formulation of the pair trading strategy
 Performance evaluation of the strategy
 Further discussion and conclusion
The main body of the report should be 3,500 words in length. This excludes any
tables, figures, references, and appendices. A penalty will be imposed if you exceed
the word limit by more than 10%. The submission deadline is on Friday 9 December
at 12 noon. All the work should be performed and saved in Eviews and/or Excel. Any
supporting work (e.g. Eviews workfiles) need to be submitted electronically along
with the report.

Tips
The key is to identify a pair of securities that exhibits significant cointegration, which
is an essential requirement for formulating your pair trading strategy. The process of
identifying such pair can be quite time consuming, therefore, potential pairs should be
pre-selected based on fundamental similarities.
In terms of the data collection, you only need prices of the securities considered.
These are relatively easy to obtain from the financial databases the University
subscribes to, a list of which can be found at:
https://libguides.st-andrews.ac.uk/c.php?g=369303&p=4853439
The criteria for formulating the pair trading strategy vary from study to study. You
may want to follow those set out in the previous studies or customise your own. The
execution of the strategy as well as the subsequent performance evaluation can also
vary greatly, ranging from simple to complex, you need to be mindful of your abilities
when making your choices.
It is important to survey the relevant academic literature on the topic. Scopus and
Google Scholars are useful tools to search journal articles. If you cite work of others,
make sure you reference them properly. Copying large chunk of text from other
sources without referencing is plagiarism. Plagiarism is a serious academic
misconduct and will be penalised heavily.
Your report will be assessed on the following criteria:
• Evidence of preparation
• Clarity and coherence
• Quality of modelling
• Quality of interpretation and discussion
• Presentation and referencing