Could somebody, please point me to a reference on "cointegration" in the sense that it is used here. (I often use statsoft's "Electronic Statistics Textbook" searches for quick clarifications - it did not return anything, which is unusual)
How is it that I trade all manner of inter and intra-market spreads and have no idea what the hell you guys are talking about? (OK, a little, and I do surf the Wilmot website from time to time, and I am an Engineer by training). I am proudly bliss in my ignorance. I revel in my stupidity. If I get a decent correlation analysis on the Bloomberg and it charts real purdy I trade 'em. Oh... the problem with statistical arbitrage is fat tails. Ask LTCM about those fat tails. Maybe Niederhoffer, too. (list is getting bigger)
Good point. There is more than one way to skin a cat. Caveat: I think you're spreading and not necessary stats arb ... technical definition.
Because you are a TRADER and not some quant sitting in a room looking for at 15% return year and you don't jump up and down in a stuppor if you return 15% a year. Correlation analysis is fine for "short term" pair trading, and the stuff that Bloomberg returns is pretty useful and a similar analysis that I used to use when pair trading. IMHO, Cointegration is meant for those that believe in CAPM or APT and want "effcient regime" long/short portfolios over a longer time frame. BTW, I credit you with getting me thinking about more "exotic" pairs, like the GE/ES trade - it opened up a whole new world to me. nitro
nitro: Do you mean those quant only looking for 15% return p.a? Is this what a quant expected after studying so much math/finance?
Hermit_trader, I am being really hard on them. Returning 15% a year on $1B is REALLY hard. At 20% of profits for hedge funds, that's 20% of $150,000,000. That's a nice payday! nitro
What about $250M then? 15% of $250M is $37M. 20% of that is still a nice payout! And don't forget the 2% management fee! nitro