# Pairs Trading Hypotheses Test

Not what you're looking for?

Say you think your positive pairs trade returns are due to pairs trades you made on small stocks (measured by market capitalization).

Describe how would you test this hypothesis?

What regression equations would you use, and what would your null and alternative hypotheses be on the coefficients?

If your positive pair trade returns are indeed from trades on small stocks, would you expect to accept or reject the null hypotheses for your coefficients?

##### Purchase this Solution

##### Solution Summary

The pairs trading hypothesis tests are examined. The positive pair trade returns are discussed.

##### Solution Preview

A pairs trade is one where we find two stocks and short one and go long the other. In this case we are looking at trying to distinguish whether our positive pairs trades on small capitalization stocks outperformed those of mid cap and large cap stocks.

In order to test this hypothesis, we would want to set up a regression equation which had a dummy variable for small cap stocks. The small cap dummy variable would have a value of 1 if the pairs trade was on small cap stocks and a value of 0 if not. It would also be informative to have a dummy variable for mid-cap stocks included as well. The mid cap would have a value of 1 if the pair trade stocks were considered mid cap ...

###### Education

- MBA, Merage School of Business, Univ of Cal, Irvine
- BA, Univ of Cal, Irvine

###### Recent Feedback

- "Thank you so much for your help, it was very helpful to see how you did it in excel. Thanks again!"
- "Awesome review. Thank you!!!!!"
- "Wow - Amazing - Thanks"
- "Thanks"
- "Thanks for your help. Your solution helps me understand the problem and its solution."

##### Purchase this Solution

##### Free BrainMass Quizzes

##### Measures of Central Tendency

This quiz evaluates the students understanding of the measures of central tendency seen in statistics. This quiz is specifically designed to incorporate the measures of central tendency as they relate to psychological research.

##### Measures of Central Tendency

Tests knowledge of the three main measures of central tendency, including some simple calculation questions.

##### Terms and Definitions for Statistics

This quiz covers basic terms and definitions of statistics.

##### Know Your Statistical Concepts

Each question is a choice-summary multiple choice question that presents you with a statistical concept and then 4 numbered statements. You must decide which (if any) of the numbered statements is/are true as they relate to the statistical concept.