Final_1.pdf
Harvey, A. C. Forecasting, Structural Time Series Model and the Kalman Filter. (Cambridge, UK. Cambridge University Press, 1991) ...
APPENDIX We describe the formulas for the Kalman filtering steps here. The notation we use is the same as that discussed in the ...
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Statistical Arbitrage Pairs PART Two ...
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73 CHAPTER 5 Overview History The first practice of statistical pairs trading is attributed to Wall Street quant Nunzio Tartagli ...
mechanical fashion and, if needed, execute them seamlessly through auto- mated trading systems. At that time, trading systems of ...
another set of pairs was created by randomly pairing the securities with one another. The trades that would have been executed b ...
time series by differencing. By extension, when analyzing multivariate time series where each of the component series is nonstat ...
librium value is zero in this case), and gis the coefficient of cointegration. ay is the error correction rate, indicative of th ...
trends model is that of a time series being expressed as a simple sum of two component time series: a stationary component and a ...
nation that results in a stationary time series. Expanding the linear combi- nation and rearranging some terms, we have (5.3) If ...
Applying the Model In this section, we fit the cointegration model to the logarithm of stock prices. For the cointegration model ...
to do exactly that. Consider a portfolio with long one share of A and short gshares of B. The return of the portfolio for a give ...
Rearranging the terms a little bit, we have (5.7) Therefore, the return on the portfolio is the increment to the spread value in ...
Ask price of Aat time t+i= $20.10 Bid price of Bat time t+i= $7.17 Average bid-ask spread for A= .0005 percent (5 basis points) ...
Once the potential pairs are identified, we verify the proposed hypoth- esis that the stock pairs are indeed cointegrated based ...
85 Introduction In Chapter 5, we explained that strategy design was essentially a three-step process. The three steps are identi ...
Running tests on 12 million pairs is definitely not a viable option. Therefore, the natural inclination is to try to reduce the ...
measure to the fundamentals of the firm. Accomplishing this would help provide a theoretical justification for the use of the sc ...
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