Quote from The_Tourist:
Have anyone tried the application of time series forecasting models to short term future projection of ratio line for 2 instruments used in pairs/spread RTM trading? What software or excel tools are there to set up for RTM condition.i.e. which forecasting model is better for RTM? Can we account for the stationarity behaviour(deterministic) of the ratio line?
I tried this. The only thing I didn't really like about this approach is the parameterization of the model that I used. The shifts in volatility can break the model, so engineering the model was 30% of the effort, and then dealing with all the various breakdowns was 70% of the effort.
I've seen academic papers where they have some fancy algorithms that are more adaptive than AR models, and they were using some sort of filtering algorithm.
The model I used had a relatively smooth equity curve but it suffered from all the problems that your typical RTM models suffer from.