Pairs trading is a common statistical arbitrage trading strategy employed by traders using a pair of co-integrated and highly positively correlated assets, though negatively correlated pairs can also be considered.
In this section, we will use machine learning to train regression-based models using the historical prices of a pair of securities that might be used in pairs trading. Given the current price of one security for a particular day, we predict the other security's price on a daily basis. The following examples uses the historical daily prices of Goldman Sachs (GS) and J.P. Morgan (JPM) traded on the New York Stock Exchange (NYSE). We will be predicting prices of JPM's stock price for the year 2018.
