Category Archives: Statistical Arbitrage

Developing Long/Short ETF Strategies

Recently I have been working on the problem of how to construct large portfolios of cointegrated securities.  My focus has been on ETFs rather that stocks, although in principle the methodology applies equally well to either, of course. My preference … Continue reading

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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 | Comments Off on Successful Statistical Arbitrage

ETF Pairs Trading with the Kalman Filter

I was asked by a reader if I could illustrate the application of the Kalman Filter technique described in my previous post with an example. Let’s take the ETF pair AGG IEF, using daily data from Jan 2006 to Feb 2015 … Continue reading

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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

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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 on Developing Statistical Arbitrage Strategies Using Cointegration

The Correlation Signal

The use of correlations is widespread in investment management theory and practice, from the construction of portfolios to the design of hedge trades to statistical arbitrage strategies. A common difficulty encountered in all of these applications is the variation in … Continue reading

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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 on Alpha Spectral Analysis

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 on A Practical Application of Regime Switching Models to Pairs Trading