Statistical Arbitrage: Algorithmic Trading Insights and Techniques

257 Pages·2007·3.65 MB·English

by  Andrew Pole

Statistical
Arbitrage
Algorithmic Trading Insights
and Techniques
ANDREW POLE
John Wiley & Sons, Inc.

Statistical
Arbitrage
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Statistical
Arbitrage
Algorithmic Trading Insights
and Techniques
ANDREW POLE
John Wiley & Sons, Inc.
Copyright(cid:1)c 2007byAndrewPole.Allrightsreserved.
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LibraryofCongressCataloging-in-PublicationData:
Pole,Andrew,1961–
Statisticalarbitrage:algorithmictradinginsightsandtechniques/
AndrewPole.
p.cm.—(Wileyfinanceseries)
Includesbibliographicalreferencesandindex.
ISBN978-0-470-13844-1(cloth)
1.Pairstrading.2.Arbitrage---Mathematicalmodels.3.Speculation-
-Mathematicalmodels. I.Title.
HG4661.P65 2007
332.64’5 — dc22
2007026257
ISBN978-0-470-13844-1
PrintedintheUnitedStatesofAmerica
10 9 8 7 6 5 4 3 2 1
To Eliza and Marina

Contents
Preface xiii
Foreword xix
Acknowledgments xxiii
CHAPTER1
MonteCarloorBust 1
Beginning 1
Whither?AndAllusions 4
CHAPTER2
StatisticalArbitrage 9
Introduction 9
NoiseModels 10
ReverseBets 11
MultipleBets 11
RuleCalibration 12
SpreadMarginsforTradeRules 16
PopcornProcess 18
IdentifyingPairs 20
RefiningPairSelection 21
EventAnalysis 22
CorrelationSearchintheTwenty-FirstCentury 26
PortfolioConfigurationandRiskControl 26
ExposuretoMarketFactors 29
MarketImpact 30
RiskControlUsingEventCorrelations 31
DynamicsandCalibration 32
EvolutionaryOperation:SingleParameterIllustration 34
vii