Supporting Strategies: Cointegration, Correlation and Technical
Analysis : Studies http://www.bitcoinprice.mobi/prediction/
Trading pairs Exxon vs SPY which has moved from its correlation can be done based on cointegration or technical analyzing the prices of the stock pairs and tries to profit from the mean-reversion process. This joint bet will generate proﬁt if the spread closes again in the near future. This trading strategy is:
- market-neutral: its returns are uncorrelated with market movements.
- statistical arbitrage index: proﬁts from temporal mispricings of XOM stock relative to its fundamental/index value.
Cointegration (left chart): look at the divergence between pairs that have moved away from each other and then back together in a regular pattern:
1. There is a gap in the last 2 days.
2. I will trade assuming the stocks will return to their correlated path
The strategy is therefore to identify when the “gap” is created and to trade in the assumption that there is a high probability the gap will close or narrow.
This pairs have a high positive correlation between them, meaning that both stocks historically tend to move together with similar price trajectories. Generally because they are traded in the same market, so the same factors impact them.
of the spread (right chart):
EXXON move together very closely and has a maximal correlation with SPY . This means it's profitable when the relative value between the two assets is perturbed from equilibrium, I can take a contrarian position and profit from the spread trading as the prices revert back to their long-run mean.
The trade should be opposite to the “gap”. SPY has performed better than XOM , in order to close the “gap” EXXON will now perform better.