Mean reversion, 24
Mean-reverting behavior, 5–6
Mergers, 140
boom, 141
“Mining syndrome,” 43, 50
Mispricing, 74
Mixture Gaussian distribution,
123–124
Model choice, 26–29
Model error, 99
Modeling stock prices, 30–32
Model selection, 194–197
Modern Control Theory, 53
Monsanto Corp. (MTC), 180–181
Morgan Stanley, 73
Moving average process (MA), 17–19
Multifactor approach, 107–108
Multifactor models. SeeFactor models
Multiple threshold design, 135–136
Multistep model, 177–180N
Newbold, P., 105
Newell Company, 180
New Jersey Holding Company Act,
140
Noise, 189
Nonparametric approach, 126–130
Nonstationary time series, 23, 79
Normal distribution, 16
NP completeness, 79O
Observation equation, 192–193
Ohm’s law, 59
Order, specifying, 152–155
Ordinary least squares, 108, 111P
Pair selection in equity markets,
85–103
common trends cointegration model,
87–90
common trends model and APT,
90–93
distance measure, 93–94
interpreting, 94–97reconciling theory and practice,
97–102
deviations from ideal conditions,
97–99
model error, 99
numerical example, 99–102
stationarity of integrated specific
returns, 97
Pairs trading, 8–9
described, 74–75
history of, 73–74
risk arbitrage pairs, 8, 9
spread, 8
statistical arbitrage pairs, 8, 9
strategy, 83–84
Parity relationship, 8, 79, 123, 125,
145
Portfolio
beta, calculation of, 47–49
calculating risk, 44–47
Positive definite, 42
Prediction-correction method, 55
Prediction equation, 190–192
Prediction step, 24, 25
Preprocessing step, 24–25
Pricing period, 144
Probability formulas, 12–13R
Random walk process, 22–24
Random walk series
filtering, 60–64
applied to S&P index, 64–67
Ratio, 8, 9, 39, 97, 121, 153, 161
Recapitalizations, 139
Recursive least squares method,
62
Regression, 108–109
Regression approach, 108–112
Regularization, 130–135
Relative pricing, 74
Residual component, 4, 5
Residual time series, 6, 108, 112,
115–116
Rice, S.O., 113, 114, 125
Risk, 39–40
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