Optimal pairs trading strategies in a cointegration framework
Résumé
Statistical arbitrage is based on pairs trading of mean-reverting returns. We used cointegration
approach and ECM-DCC-GARCH to construct 98 pairs of 152 stocks of 3 currencies. Stocks trading is
done by Contract for Difference, a financial derivative product which facilitates short selling and
provides a leverage up to 25 times. To measure the performance of a leveraged strategy, we
introduced the profit factor which is the annualized return rate per unit risk. And the historical risk is
measured by maximum drawdown. We compared three main strategies: percentage, standard
deviation of cointegration long term residuals and Bollinger Bands (dynamic standard deviation), with
and without double confirmation of short term standard deviation modeled by ECM-DCC-GARCH. Each
of the three main strategies is optimized by two optimizers: absolute profit and profit factor. The
optimization period goes from 2012-01-01 to 2014-12-31, and validation period is from 2015-01-01 to
2016-06-01. Our results showed that the USD Bollinger Bands strategy without double confirmation
and optimized by profit factor, outperformed other strategies and provided the highest annualized
return rate per unit risk.
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