Any good book on Statistical Arbitrage?

GloriaBrown · May 9, 2016

Matt1234au said:
Hi again

Aug 2007 â intra-day strategies were profitable virtually every day â certainly net profitable at 31 Aug. For the whole month â arb strategies held overnight, minor profit at month end but there was a nasty drawdown mid month.

Returns â for your standard ETF versus basket your return will be about 2-5% per trade (when profitable!). At Chanâs website he has a fully disclosed ETF versus basket strategy using XLE and his real world example gets 3%. Stat arb is for grinding out regular profits; you donât get massive wins, or massive losses â though you can get a fright like Aug 2007. Thatâs why you need to see all your trades in the context of a holistic risk management strategy. What is your capital allocation per pair, can you hedge the whole portfolio, whatâs the correlations between those trades etc. Itâs at these points you can add a real value to your complete strategy.

Sharpes â I wonât enter a trade unless it has a back tested theoretical Sharpe of at least 2.5, but actual realised Sharpe tends to be 1.7 â 2.1. The real world is never as good as your back tests! But having said that I have stuck with some pairs that were in the low 1s.

I see an ad in efinancialcareers.com today where they say - Minimum Sharpe ratio of 4, Sharpe 10-15+ preferred.

I have never met anyone with a consistent Sharpe of over 4.5 but I am confident they exist. However, 10+ seems impossible for a price taking retail trader paying the spread. Maybe a market maker can substantially reduce their standard deviation of return and therefore they have a higher implied Sharpe. I understand theoretically how you could do it in a high frequency low latency situation and I know some good algo boys but they are nowhere near 10+. I also see that the ad says equities, so Iâm as keen as you to know how they do it.

Performance degradation: Statistical relationships break down. Management can stuff a company up, FDA approval can be delayed, investors lose interest in companies and suddenly things donât track the way they used to. Thatâs why over night I am running combinations of virtually every stock, ETF and option against basket regressions and then keeping a track of their theoretical past performance.

I guess my approach is more dynamic stat arb, you may need to make basket changes more regularly than you think.

Average holding period is about 17 days for the over-night basket trades.

Why hasnât all the edge been sucked out by the hedge funds? Because I am not entering or unwinding million dollar positions, I (and you) can be more nimble due to our size of transaction so we can get a good entry/exit price; we donât have to scale in over say a 5 cent range.

Secondly I can trade what I like, I donât need to run my ideas past a manager.

Also I have got hedging on some baskets plus Iâve got pairs running across (on the surface) stocks that seem to have nothing in common (hint: look deeper â maybe same supplier, maybe the stock price has a high regression to a particular economic factor, thereâs always an reason).

Stat arb isnât very sexy. You donât needs screen full of indicators, in fact most of the work is actually pretty boring. The computers just grind over data for hours on end punching out averages, correlations and probabilities. Even when the trades are placed you donât have to watch your trades tick by tick. However, itâs this procedural approach - a bit like being in a job, combined with the (in my case) regular grinding out of profits that I find appealing. It insulates me from the massive emotional highs, lows and frustrations that I used to experience as an options trader.

Stat arb isnât for everyone but Ezbentley â your time spent investigating stat arb will be well worth it. Enjoy the journey.
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sharp ratio 15 is godlike

algonoise · Nov 4, 2016

Back when the OP was doing this, it was great. Now, not so much. HFTs just too good intraday.

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Any good book on Statistical Arbitrage?

GloriaBrown

algonoise