Any good book on Statistical Arbitrage?

Quote from Corey:

Great quote from Wilmott forum's on Correlation vs Cointegration:
More...

That is a great quote.

I know that correlation is not the same as cointegration, I also know that you can have cointegration without correlation...what I don't understand is how you can have correlation without co-integration. Of course a stock is perfectly correlated to itself, but not co-integrated (because the returns would never deviate obviously), but what I mean is for practical purposes - if, say, an ETF is 97% correlated with one of it's component stocks, how can it not be cointegrated? Somebody help me out here!
 
Quote from ochristo:

That is a great quote.

I know that correlation is not the same as cointegration, I also know that you can have cointegration without correlation...what I don't understand is how you can have correlation without co-integration. Of course a stock is perfectly correlated to itself, but not co-integrated (because the returns would never deviate obviously), but what I mean is for practical purposes - if, say, an ETF is 97% correlated with one of it's component stocks, how can it not be cointegrated? Somebody help me out here!
More...

When people talk about correlation, they usually mean "return" correlation, not "price" correlation. So it's quite possible that returns are correlated but the prices deviate substantially. I find gummy's website a very good reference to understand some basic concepts:

http://www.financialwebring.org/gummystuff/cointegration.htm
http://www.financialwebring.org/gummystuff/spearman-correlation.htm
 
Quote from Matt1234au:

Hi

Stat arb is based on cointegration, not correlation. Chan describes it nicely in the article:
Cointegration is not the same as correlation
http://epchan.blogspot.com/2006/11/cointegration-is-not-same-as.html

Cointegration tests mean reversion, correlation doesn't.
I test for cointegration using the last 252 data points whether that be, monthly close, daily close, 10 minute bars etc.

Then from those cointegration tests I calculate for the pairs that have a dickey fuller (its a cointegration test) of better than 90% the hedge ratio and the standard deviation that the pairs are currently apart. If more than 2 std then I trade.
More...

Hey Matt,

About the hedge ratio: Chan includes an example of how to calculate it in his book using Matlab. I just want to know if I were to use excel to calculate this ratio, would I want to look at the coefficients from the linear regression of the stock prices?

Thanks
 
Hi Matt,

I notice that Chan has a few live spreads for pairs of ETF on his website. I wanted to ask you if you have tested out these pairs of ETF through MATLAB and as a trader in the Stat Arb field would you put on the trade especially for the pair of ETFs with a big Z-score. what did you do to test the cointegration for the paired ETFs?

I just started using Matlab and I have been inputing the codes that Chan has place in the book in particular example 3_4m but Im getting an error message "??? Error using ==> xlsread at 189
XLSREAD unable to open file IGE.
File C:\Users\bt\Documents\MATLAB\IGE.xls not found."


If you could help, that'd be great.

thanks
 
Quote from Jmoney:
I just started using Matlab and I have been inputing the codes that Chan has place in the book in particular example 3_4m but Im getting an error message "??? Error using ==> xlsread at 189
XLSREAD unable to open file IGE.
File C:\Users\bt\Documents\MATLAB\IGE.xls not found."

If you could help, that'd be great.

thanks
More...
You need the file IGE.xls in the folder C:\Users\bt\Documents\MATLAB\
I attached the file.
You may need to change the code for the dates (mm/dd/yyyy to mm-dd-yyyy)
You can PM for other bugs (to ge it to run but no further!)

Good luck
 

Attachments

Quote from Matt1234au:
... Also search there for a PhD thesis by a guy called Burgess. It’s no longer on his personal site but it is still posted to the forum itself. Its 370 pages but worth the read...
More...
That was quite brutal. I read most of it and yes, there are very good insights. A usefull read but you need some theoretical finance/math background to read it.
I now understand how pairs trading can be done intraday with black boxes. Putting the traditional pairs trading (correlation based) as an antique technique. Still usable as an art like technical analysis but not blindly.
Chang chapter about cointegration was also of help.
 
Quote from ochristo:

Hey Matt,

About the hedge ratio: Chan includes an example of how to calculate it in his book using Matlab. I just want to know if I were to use excel to calculate this ratio, would I want to look at the coefficients from the linear regression of the stock prices?

Thanks
More...

Yes. If you look into the Matlab code, the hedge ratio is simple the slope of the regression line. So in excel you can just add a trendline to the regression and set the intercept to zero. I have verified this with Chan's example of GLD/GDX.
 
Matt,

Are you still in the Stat Arb arena?

thanks,

Walt

Quote from Matt1234au:

ezbentley
Look at the two articles DSA and DSA2 (Daily Stock Activity) plus DSO (Daily Stock Oscillation).
Also plot your own graph of overnight change v daily change - see which stocks have a bias towards one or the other
More...
 
yeah, its a good starting point. finds correlation and back tests based on deviation. I wouldn't recommend using it alone to trade. I use it to run vast numbers of stocks for correlation sometimes
 
You must log in or register to reply here.
Back
Top