Pairs Trading and Market Timing
Study from academic researchers and industry practitioners has demonstrated that pairs trading strategy has the potential to generate consistent and stable risk adjusted returns in all market conditions. Our own research has also illustrated that pairs trading strategy can be implemented on daily base as well as intraday base. This blog will show the real out-of-sample pairs trades between NASDAQ 100 Index and Dow Jones Industry AVG Index, and the implied market timing.
Friday 22 January 2016
Friday 18 December 2015
Intraday Alpha
I got an idea of Intraday Alpha instead of Market Timing while meeting with equity derivative research team from a broker. Here is the performance of the intraday alpha before, during, and after the Fed announcement of rate lift:
Tuesday 15 December 2015
Ultimate timing system
Friday 4 December 2015
Long bias in the equity market, any selloff is short live
Two-day selloff is stopped by the strong job report. This is another evidence that news can always cause unpredictable outcomes. Last strong job report caused a selloff, this time comes with a strong rebound.
Anyway, our pairs trading model has been proved to be able to pick up the market directions. It promptly suggests to close the previous positions and open "long NDX and short Dow", or simply buy in SPX, or short VIX.
It's also very interesting that during the strong selloff, the previous "short NDX long Dow" still lost 20 bps, while short position in SPX gained 0.76% in 4 days.
Anyway, our pairs trading model has been proved to be able to pick up the market directions. It promptly suggests to close the previous positions and open "long NDX and short Dow", or simply buy in SPX, or short VIX.
It's also very interesting that during the strong selloff, the previous "short NDX long Dow" still lost 20 bps, while short position in SPX gained 0.76% in 4 days.
Monday 30 November 2015
The uptrend is fading
YTD the average holding period is about 13 days. Since last uptrend signal appeared on Nov 16, it has been 14 days. It's not surprised that in this morning, the model gives us a downtrend signal. Pairs trading (long NDX short DOW) gained 1.1%, while buying S&P 500 Index would net 3% in last two weeks.
Thursday 19 November 2015
2015 YTD Live performance
While we still have one more month to end the year of 2015, we can celebrate the wonderful live performance of the Index Pairs Trading and Its Implied Timing Ability.
Saturday 14 November 2015
Well predicted urgly week
The S&P 500 Index dropped 3.6% in the week of November 9 - 13. Well, this selloff is well expected and predicted by our models.
The pairs trading model suggested to short NDX and long INDU on October 30, which implied that the equity market was likely to drop in the near future.
The index timing model showed a sell signal on Novermber 5. Even though there was a short-live buy signal before the market close of Novermber 11, a strong sell signal followed the market open on Novermber 12.
When both models point to the same direction, the market is very hard not to follow the trend.
The pairs trading model suggested to short NDX and long INDU on October 30, which implied that the equity market was likely to drop in the near future.
The index timing model showed a sell signal on Novermber 5. Even though there was a short-live buy signal before the market close of Novermber 11, a strong sell signal followed the market open on Novermber 12.
When both models point to the same direction, the market is very hard not to follow the trend.
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