Dynamic modeling of mean-reverting spreads for statistical arbitrage
| dc.creator | Triantafyllopoulos, Kostas | |
| dc.creator | Montana, Giovanni | |
| dc.date | 2008-08-12 | |
| dc.date | 2009-05-19 | |
| dc.date.accessioned | 2026-07-07T13:15:45Z | |
| dc.date.available | 2026-07-07T13:15:45Z | |
| dc.description | Statistical arbitrage strategies, such as pairs trading and its generalizations, rely on the construction of mean-reverting spreads enjoying a certain degree of predictability. Gaussian linear state-space processes have recently been proposed as a model for such spreads under the assumption that the observed process is a noisy realization of some hidden states. Real-time estimation of the unobserved spread process can reveal temporary market inefficiencies which can then be exploited to generate excess returns. Building on previous work, we embrace the state-space framework for modeling spread processes and extend this methodology along three different directions. First, we introduce time-dependency in the model parameters, which allows for quick adaptation to changes in the data generating process. Second, we provide an on-line estimation algorithm that can be constantly run in real-time. Being computationally fast, the algorithm is particularly suitable for building aggressive trading strategies based on high-frequency data and may be used as a monitoring device for mean-reversion. Finally, our framework naturally provides informative uncertainty measures of all the estimated parameters. Experimental results based on Monte Carlo simulations and historical equity data are discussed, including a co-integration relationship involving two exchange-traded funds. | |
| dc.description | 34 pages, 6 figures. Submitted | |
| dc.identifier | https://arxiv.org/abs/0808.1710 | |
| dc.identifier | http://arxiv.org/abs/0808.1710 | |
| dc.identifier.uri | http://salesiana.dossiersoluciones.com/handle/123456789/230569 | |
| dc.subject | Statistical Finance | |
| dc.subject | Portfolio Management | |
| dc.subject | Applications | |
| dc.subject | Methodology | |
| dc.title | Dynamic modeling of mean-reverting spreads for statistical arbitrage | |
| dc.type | text |