[R-SIG-Finance] Pairs trading & cointegration

[Christian Prinoth]

I would try to find cointegrated portfolios, instead of pairs of single
stocks. That might give you more stable cointegration relationships.
There used to be some papers on the topic by Carol Alexander on the net.

Christian Prinoth


> -----Original Message-----
> From: r-sig-finance-bounces at stat.math.ethz.ch
> [mailto:r-sig-finance-bounces at stat.math.ethz.ch] On Behalf Of
> Brian Giarrocco
> Sent: 23 February, 2010 03:32
> To: r-sig-finance at stat.math.ethz.ch
> Subject: [R-SIG-Finance] Pairs trading & cointegration
>
> First time posting here so I hope I get it right!
>
> I'm an undergraduate in an American University, and am Computer
> Science/Math/Finance focused. I'm attempting to create a
> basic Pairs Trading
> portfolio as a project and have found many good resources
> online that have
> pointed me in the right direction.
>
> I have a symbol list of 50 Utility stocks w/ 500k+ ADV. I
> then compare each
> symbol to every other symbol using the Dickey-Fuller test,
> and then accept a
> pair if it passes with 95% confidence. Pretty simple idea.
>
> I created a python script to back-test different entry and
> exit points, but
> the problem, as most of you may have already found -- is that the
> co-integration does not significantly hold. The profitability
> seems to be
> around 1-2% over a year period. (Profitable, but not good)
>
> I'm looking to expand this out, does anyone have any
> suggestions on what I
> can add to tighten up the confidence of the cointegration. Is
> it possible to
> add in fundamentals? Are there any good papers that deal with
> cointegration
> between equities (Specifically in the US Equities Market)?
>
> I've posted all my code to: http://g-rock.dreamhosters.com/pairs/
> With the hope that it may help someone in the future.
>
>
> Thanks for any tips,
> Brian Giarrocco
> bvgiarro at edisto.cofc.edu
>
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>
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