Dr. Doina Bein: ([email protected])
Sokheng teang: 📫 [email protected]
Hamid Suha: 📫 [email protected]
The Idea:
Developed in the 1980’s by a group of Quants at Morgan Stanley, who reportedly made over $50 million profit for the firm in 1987
A contrarian strategy that tries to profit from the principles of mean-reversion processes
In theory, one could expand the strategy to include a basket of more than a pair of related stocks
The Hypothesis:
This experiment will test the following hypotheses:
- Choose a pair of stocks that move together very closely, based on a certain criteria (i.e. Coke & Pepsi)
- Wait until the prices diverge beyond a certain threshold, then short the “winner” and buy the “loser”
- Reverse your positions when the two prices converge --> Profit from the reversal in trend
Invester Decision:
- Pair Selection Criteria
- Correlation (Parametric & Non-Parametric Spearman’s Rho)
- Dickey-Fuller Test Statistic (Cointegration)
- Trading Threshold (areas of consideration)
- Volatility of the Market
- Historical returns
- Cost of each transaction
Example of the project result:
