Hi All,Do you know any papers which consider pairs trading (aka statistical arbitrage) on foreign exchange? I couldn't find any. Maybe it's a bad idea?

Every currency trade is a pairs trade (long one currency, short another). Why would two different exchange rates converge? (I can think of answers to this question, but non is helpful for trading.)

these are for equities. not sure if they apply to fx.?A New Approach to Modeling and Estimation for Pairs Trading, Binh Do, Robert Faff, Kais Hamza, Working Paper, May 29, 2006. ?Pairs Trading ? A Cointegration Approach. Arlen David Schmidt, Finance Honors Thesis, University of Sydney, November 2008, Pages 1?130. ?Does Simple Pairs Trading Still Work? Binh Do , Robert Faff. Financial Analysts Journal. July/August 2010, Vol. 66, No. 4, pp: 83?95.

QuoteOriginally posted by: ehEvery currency trade is a pairs trade (long one currency, short another). Why would two different exchange rates converge? (I can think of answers to this question, but non is helpful for trading.)Well... every trade can be viewed as a pair trade (e.g. you are long stocks and short USD) Why the same logic (as for stocks) cannot be applied to pairs trading on currencies? I'm just curious. May be it's just me and it is clear to everyone that pairs trading is not applicable to currencies. Otherwise it would be nice looking into the reasons behind this. Anyway the negative answer doesn't look so trivial to me.

QuoteOriginally posted by: hli7these are for equities. not sure if they apply to fx.This exactly the question I'm askingI haven't seen any papers on pair trading of currencies yet. So most probably it doesn't work for FX. But even if this is the case, I would like to know the reasons.

QuoteOriginally posted by: AKalmykovQuoteOriginally posted by: ehEvery currency trade is a pairs trade (long one currency, short another). Why would two different exchange rates converge? (I can think of answers to this question, but non is helpful for trading.)Well... every trade can be viewed as a pair trade (e.g. you are long stocks and short USD) Why the same logic (as for stocks) cannot be applied to pairs trading on currencies? I'm just curious. May be it's just me and it is clear to everyone that pairs trading is not applicable to currencies. Otherwise it would be nice looking into the reasons behind this. Anyway the negative answer doesn't look so trivial to me.I think that buying stock over cash is more of a risk-return decision (although I take your point). Pairs trading is more about choosing between two assets from the same class with similar risk characteristics (to a degree, the more similar the better).To get pairs trading to work for currencies, you need to find 2 currencies that move together verses some reference reserve currency. Fundamentally, you are looking for 2 countries with economies that move together. This is less likely than 2 stocks moving together.

http://www.fxalgotrader.com/Website%20C ... rader.html

can someone share the paper "Imaginal Spreads and Pairs Trading"