Statistical arbitrage with options
The premise of statistical arbitrage, stat arb for short, is that there is a statistical mispricing between a set of securities which we look to exploit. Typically a strategy requires going long a set of stocks and short another. StatArb is all about mean reversion, in essence you are saying that the spread between any two stocks should be constant or slowly evolving throughout timeany deviations from the spread present a trading opportunity since in StatArb we believe the spread is mean reverting.
Typically this means that the stocks are in the same market sector or even better the same company some companies have A and B shares with different voting rights or trade on different exchanges!
Some examples of fundamentally similar pairs would be Royal Dutch Shell A vs Royal Dutch Shell B shares, Goldman Sachs vs JP Morgan, Apple vs ARM their chip supplierARM vs ARM ADR, some cross sector groups may also work such as Gold Mining vs Gold Price.
The most common test is to look for cointegration http: When testing for cointegration a Pvalue http: When talking statistical arbitrage with options statisitical arbitrage many people often get confused between correlation and cointegration. One of the best explanations of cointegration is as follows: They approach a busy road and the man puts his dog on a lead, the man and the dog are now cointegrated.
Equation for going long stock A and short n lots of Stock B. Setting Hence is stationary assuming that the hedge ratio,remains constant!!!
The spread plots clearly illustrate the merits of co-integration over correlation for a mean-reverting strategy.
Truly looking forward to more posts related to statistical arbitrage. Thanks, in this post I showed the mathematics that should create a stationary signal.
The main assumption was that the growth rate mu was constant or that the growth of both stocks drifts slow leaving the hedge ratio n forex trading journal spreadsheet excel. The next post will detail how we test green roofing stock market assumption.
Statistical Arbitrage — Testing for Cointegration — Augmented Dicky Fuller Gekko Quant — Quantitative Trading. Estrategia de forex con correlaciones aplicadas - TradingUnited. Your email address will not be published. Gekko Quant — Quantitative Trading Quantitative Trading, Statistical Arbitrage, Machine Learning and Binary Options.
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What type of stocks make good pairs? What is the mathematical definition of a good pair? What is the difference between correlation and cointegration? Correlation — If two stocks are correlated then if stock A has an upday then stock B will have an upday Cointegration — If two stocks are cointegrated then it is possible to form a stationary pair from some linear combination of stock A and B One of the best explanations of cointegration is as follows: Lets explore cointegration some more: Equation for going long stock A and short n lots of Stock B Setting Hence is stationary assuming that the hedge ratio,remains constant!!!
Example of correlated stocks: Notice the spread blowing up Example of cointegrated stocks: Hi Gekko I find your blog very interesting. Is it still on? Arun on December 6, at 7: GekkoQuant on December 8, at 2: Leave a Reply Cancel reply Your email address will not be published.
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