Pairs selection and outranking : an application to the S&P 100 Index

Pairs trading is a popular quantitative speculation strategy. This article proposes a general and flexible framework fors pairs selection. The method uses multiple return forecasts based on bivariate information sets and Multicriteria decision techniques. Our approach can be seen as a sort of forecast combination but the output of the method is a ranking. It helps to detect potentially under-and overvalued stocks. A first application with S&P 100 index stocks provides promising results in terms of excess return and directional forecasting.