Category Archives: Pairs Trading

Successful Statistical Arbitrage

I tend not to get involved in Q&A with readers of my blog, or with investors.  I am at a point in my life where I spend my time mostly doing what I want to do, rather than what other … Continue reading

Posted in Cointegration, Kalman Filter, Pairs Trading, Statistical Arbitrage | Leave a comment

Statistical Arbitrage Using the Kalman Filter

One of the challenges with the cointegration approach to statistical arbitrage which I discussed in my previous post, is that cointegration relationships are seldom static: they change quite frequently and often break down completely.  Back in 2009 I began experimenting … Continue reading

Posted in Kalman Filter, Matlab, Pairs Trading, Statistical Arbitrage | Leave a comment

Developing Statistical Arbitrage Strategies Using Cointegration

In his latest book (Algorithmic Trading: Winning Strategies and their Rationale, Wiley, 2013) Ernie Chan does an excellent job of setting out the procedures for developing statistical arbitrage strategies using cointegration.  In such mean-reverting strategies, long positions are taken in … Continue reading

Posted in Cointegration, Johansen, Matlab, Mean Reversion, Pairs Trading, Statistical Arbitrage, Strategy Development, Systematic Strategies | Comments Off

Alpha Spectral Analysis

One of the questions of interest is the optimal sampling frequency to use for extracting the alpha signal from an alpha generation function.  We can use Fourier transforms to help identify the cyclical behavior of the strategy alpha and hence … Continue reading

Posted in Forecasting, Fourier Transforms, High Frequency Finance, Pairs Trading, Principal Components Analysis, Signal Processing, Statistical Arbitrage | Tagged , , , , , | Comments Off

A Practical Application of Regime Switching Models to Pairs Trading

In the previous post I outlined some of the available techniques used for modeling market states.  The following is an illustration of how these techniques can be applied in practice.    You can download this post in pdf format here. The chart … Continue reading

Posted in ARMA, Econometrics, ETFs, Markov Model, Mean Reversion, Pairs Trading, Regime Switching, Statistical Arbitrage | Tagged , , , , , | Comments Off