Final_1.pdf

...

Pairs Trading fm_01_4273.qxd 7/26/04 2:20 PM Page i ...

Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North ...

Pairs Trading Quantitative Methods and Analysis GANAPATHY VIDYAMURTHY John Wiley & Sons, Inc. fm_01_4273.qxd 7/26/04 2:20 PM ...

Copyright © 2004 by Ganapathy Vidyamurthy. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. P ...

v Preface ix Acknowledgments xi PART ONE Contents ...

PART TWO vi CONTENTS ...

PART THREE Contents vii CHAPTER Background Material Introduction The CAPM Model Market Neutral Strategy Pairs Trading Outline A ...

Applying the Kalman Filter 193 Model Selection 194 Applications to Trading 197 Index 205 viii CONTENTS fm_01_4273.qxd 7/26/04 2: ...

ix M ost book readers are likely to concur with the idea that the least read portion of any book is the preface. With that in mi ...

Oftentimes, the market poses itself as the elephant. There are people who say that predicting the market is like predicting the ...

xi A ll of what is in the book has resulted from the people who have touched my life, and I wish to acknowledge them. First, I t ...

Last, but most importantly, I wish to thank my wife, Lalitha, for all the wonderful years, for teaching me regularization and be ...

Background Material PART One ...

...

3 W e start at the very beginning (a very good place to start). We begin with The CAPM Model THE CAPM MODEL CAPM is an acronym f ...

instance, if the beta of the asset happens to be 3.0 and the market moves 1 percent, the systematic component of the asset retur ...

(1.2) that is, beta is the covariance between the asset and market returns divided by the variance of the market returns. To see ...

value) of the residual time series.^1 This mean-reverting behavior can then be exploited in the process of return prediction, le ...

Thus, the combined portfolio has an effective beta of –rbA+bB. This value becomes zero, when r=bB/bA. Thus, by a judicious choic ...