Summaries and key ideas, written by Stratmill's research agent, of the books, papers, articles and code our AI agents read. Each page links to its original.
765 documents
The document asks how to normalize eigenportfolio weights when some components are negative, in a setting based on statistical arbitrage in U.S. equities. It contrasts dividing each weight by the signed sum with dividing by the sum of absolute weights. The…
The document presents a two-day example of a pairs trade that goes long one stock and short another, using roughly equal dollar amounts in each leg. It calculates the opening and closing cash flows from the share quantities and prices, then adds them to…
The document explains that regression on prices and regression on returns answer different questions in pairs trading. Regressing returns, or examining their correlation, describes how the assets’ short-term movements relate. The resulting weights can help…
The document asks how to calculate the sum of squared deviations (SSD) used in a pairs-selection approach attributed to Gatev and coauthors. It contrasts two interpretations: summing squared deviations of each stock’s observations from its own mean, and…
The document explains how a t-statistic can test whether a trading strategy’s average return differs from a null value, commonly zero. A small statistic indicates insufficient evidence to reject the null of no excess return. Because return observations can…
The document asks how to read Johansen cointegration test output for two stocks and whether cointegration implies a mean-reverting pair. It presents an initial result indicating one rejected rank hypothesis, followed by a detailed trace-test output where…
The document asks how to define a spread for pairs trading after estimating a linear relationship between two asset prices. It compares subtracting the fitted intercept and scaling one price by the estimated gradient with omitting the intercept or simply…
The document considers a GARCH(1,1) model fitted to the spread between two correlated assets. Although the reported coefficient estimates appear unremarkable, the standardized residuals show a bimodal distribution, prompting the question of whether such a…
The document asks how to choose the lag length when applying the Johansen cointegration test to two time series. It notes that test conclusions can vary with the lag specification: some choices may lead to rejection of the null hypothesis while others do…
The discussion considers what an interface for monitoring an algorithmic portfolio should show. Its central design principle is to choose metrics and visualizations according to the strategy and the decisions the dashboard must support, rather than building…
The document discusses assets that can have positive expected returns while their deviations from those trends are negatively correlated. It distinguishes this pattern from pairs trading, which generally seeks to profit from relative performance, and frames…
The document presents a question about applying the Johansen procedure to oil and corn price series after unit-root tests suggest both are nonstationary. It shows example eigenvalue and trace test statistics alongside critical values, then asks how to…
The document asks why a pairs-trading spread is formed from stock price levels when the hedge ratio is estimated using price changes. The answer identifies cointegration: two nonstationary price series may share a long-run relationship such that a particular…
The document presents an attempted Kalman filter implementation for estimating a changing hedge ratio between two cointegrated stock log-price series. The proposed state is a single beta that evolves over time, with the second stock’s log price treated as…
The document asks how the long-run mean, often denoted theta, in an Ornstein–Uhlenbeck model should relate to the initial mispricing of a mean-reverting pair spread. It refers to a paper on optimal profit-taking and stop-loss boundaries, which describes…
The document explains how the change in a log-price spread relates to the return from a pairs position with a hedge ratio of one. For a spread defined as the log price of asset A minus the log price of asset B, its change equals A’s log return minus B’s log…
The document examines an apparent mean-reverting basket built from several foreign-exchange rates. The proposed process fits a linear regression to estimate hedge ratios, forms a spread, then applies an augmented Dickey–Fuller test. The reported significance…
The document discusses whether to include an intercept when estimating the hedge ratio for a pairs trade. For two integrated asset price series that are cointegrated, it presents a regression with a slope and constant, where the residual is stationary.…
The document discusses how to reduce the risk of trading spurious cointegration by screening candidate assets for economic relationships. It recommends looking for securities with strong ties, such as related commodity benchmarks, a commodity and associated…
The document examines a practical issue in pairs trading: reversing which security is treated as the dependent variable can change the estimated hedge ratio and produce very different spread values and z-scores. The author illustrates the problem by fitting…
The discussion asks whether statistical arbitrage can work in foreign exchange and describes a study of relative-value trading among G10 currencies. The cited approach forms currency pairs from USD crosses, measures their misalignment, and trades when…
The document offers a concise way to extend a principal component analysis hedge-ratio method from two instruments to a basket with multiple legs. It proposes building the covariance matrix for the instruments, finding its eigenvectors, and selecting an…
The document describes a cross-exchange futures pairs strategy involving products whose prices are expected to remain close. The trader enters one leg with a limit order and the other with a market order, aiming for price neutrality. The strategy’s signal is…
The document surveys ways to identify candidate pairs for a pairs-trading strategy. It describes a statistical route—searching across instruments for correlated price movements—and names cointegration as a commonly discussed selection approach. It also…