Arbitrage Strategy

Discussion in 'Strategy Building' started by Hammy27, Dec 15, 2011.

  1. Exactly. Their positions required a longer term holding committment ....and that's what did them in.
     
    #61     Jan 7, 2012
  2. I think there was a bit more to it than that, and as I understand it, the portfolio on net unwound profitably over time. A lot of time.
     
    #62     Jan 9, 2012
  3. Hammy27

    Hammy27

    ok... now the thread is about LTCM :)

    Since I like to talk about stat-arb I post a simple graph showing a pair-strategy.
    If you entered the strategy when the spread is below 0.06 (exit@0) and shorted the spread when it's above 0.04 (exit@0), then you would have earned 12'808 CHF (or a multiple of). Since the strategy is $-neutral your initial amount is 0CHF (I invested 20k CHF on each side). The strategy would have generated 7 Trades in a 3 years timeframe with an average holding period about 36 days. All the trades are profitable.

    If I run the spread through an Augmented Dickey Fuller Test I get a ADF stat of -3.68 with a p-value about 0.024. That means that with a probability of 97.6% the spread is cointegrating.
     
    #63     Jan 12, 2012