ISBN0471460672

Totally agree with Dr. Bruhn. The book keeps mathematics to a minimum, simply reviewing a collection of time series analysis techniques and putting those into a trading context. I can understand however that this might be a rather tedious read for someone who hasn't been exposed to statistics or time series analysis before.

For someone who has the ambition to get on top of the material, I would recommend reading Chris Brooks's "Introductory econometrics for finance" first or as accompanying text. A quite easy and enjoyable read into time series analysis.

I haven't looked into pairs trading before, but since I have taken a postgrad course in econometrics, all the concepts were familiar to me and partially covered in my course. I found the book to be a nice summary of what I had learned which might serve me well as a reference for the future.

My conclusion is that this book is a nice, enjoyable read for someone with an econometric/ statistical background, but may be challenging (but certainly managable with good accompanying texts) for newbies.

I have mixed feelings about this book: on the one hand it's a good overview of statistical and risk (merger) arbitrage. On the other, it is pretty shallow in terms of both practice and theory.

It is certainly not possible to use it directly for trading (like any other published book, I guess). An example of a theoretical flaw is the dodgy usage of bootstrap methodology which is a lot more assumption-sensitive tool than it is generally believed. One more example when the idea itself is nice but the implementation is not: the author shows how to assess VaR for a pair of assets and doesn't seem to notice that the estimated probability of deal-break is risk-neutral, not physical probability and thus can not be directly used to estimate VaR which is tied to the physical probability distribution.

There's a possibility, however, that these and other discrepancies are a result of the author's unwillingless to disclose too much. Indeed, I have yet to see a book that properly covers the gap between the original cointegration results (obtained around 1985) and their real industrial implementation. If anyone can suggest a deeper book on Statistical Arbitrage, please let me know (click on my name above).

I was looking for books on stat arb and risk arb and was surprised that not many titles showed up for my search on Amazon. I eventually bought this book (a used copy) and although the book covers exactly the kind of stuff you want to learn about pairs trading, the writing is very poor and there are way too many places where the sentences don't make any sense, regardless of your math/stat background. This book is not a how-to book. It's a general treatise and not a good one at that. I cannot recommend this book. You may want to check out Tsay's financial time series analysis book which, although not specifically for pairs trading, has all the essential materials.

When people talk about "quant" stuff, they are generally talking about two fairly distinct kinds of quant. There are the derivatives guys (options sell side & risk hedgers), and the 'statistical arbitrage' guys. This is one of the best books for a larval 'statistical arbitrage' guy. 'Statistical arbitrage' is a term referring to the techniques used by sophisticated hedge funds and trading desks to provide 'risk free' returns. I stick in the scare quotes around these phrases, because they're not really arbitrage, though they can be pretty decoupled from market returns. The techniques go well beyond just trading pairs, so the phrase, 'stat arb' is probably with us for good, even though it is often neither stat nor arb. The mean reverting versions of these techniques were largely invented by Nunzio Tartaglia and company (primarily Gerry Bamberger according to Thorp) at Morgan Stanley in the 1980s. Many of his underlings went on to found their own hedge funds, and the secret eventually became relatively common knowledge. Boesky was one of the more famous practitioners of merger arbitrage, which is an older, related technique.

This book is a fun introduction to 'statistical arbitrage,' concentrating on the standard "mean reverting pairs" variety, and a decent explanation of merger arbitrage which he unifies with mean reverting stat arb in an interesting way. These two strategies still form the basis of a large number of high frequency techniques in one form or another. In fact, the book provides enough background material to be useful for all kinds of techniques for finding alpha; it has a very clear treatment of factor models, time series analysis (best low level one I have ever read, anywhere) and what market neutrality is and isn't. He provides a decent amount of discussion of the complexities surrounding tradeability and other practical issues that get swept under the rug in most books.

Sure, there are a lot of specific 'stat arb' techniques he doesn't mention explicitly. He doesn't talk about basket trading plays, index arbitrage, volatility arbitrage or any of the other myriad clever (and often over my head) techniques used by sophisticated fund managers to vacuum up loose change that dumb people leave on the street. So what? Vidyamurthy gives you enough material you can go out and learn the practical details of real strategies on your own. If you're gifted enough, you can go figure them out (and more) for yourself once you understand the material in the book: they're mostly variations on these themes. Why should Vidyamurthy give away the keys to the kingdom for $100? Be happy he wrote the book at all. Presumably, he makes a living actually doing 'stat arb' type things, and his motivation was to have a book to give to his underlings so he didn't have to explain GARCH and cointegration to someone who breathes out of his mouth for the 9,000th time.

Anyone who can't read this book simply doesn't have the intellectual horsepower or attention span to do this kind of trading. The book is almost excruciatingly clear, it is very short, and even does the MBA's the favor of tucking the scary mathematics involving matrices and standard deviations safely away in chapter appendices. I mean, it even has cartoons and funny anecdotes (which are actually very funny: I detect a Wodehouse fan in Vidyamurthy). You have to actually pay attention while you read, and some sections, you may have to read twice. The concepts will not leap off the page and embed themselves into your frontal lobes, but it really isn't that difficult for any intelligent person to understand. I can think of no better introduction to pairs trading, or general alpha quant type stuff than this book. It should probably be on every wannabe quant or trader's desk if it isn't already etched into the fiber of their being.

It's a good read even with the somewhat unorthodox mathematical notation. The overall concept of pairs trading is introduced well, with just enough detail to tempt the more adventurous gambler. The author appears well versed in the subject and writes well but assumes a relatively high level of mathematical maturity on the part of the reader.