Elliott Pairs Trading Model, 2005

Revision for “Elliott Pairs Trading Model, 2005” created on April 23, 2015 @ 18:04:50

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Elliott Pairs Trading Model, 2005
This paper models the spread of a pair (or any mean reverting synthetic asset) as a discrete Ornstein-Uhlenbeck (O-U) process. It then uses the Kalman filter to estimated the "true" (or hidden) price for the spread. When the observed price is bigger than the estimated true price by a threshold, we sell; otherwise we buy. The threshold and average holding time of a trade can be computed from the properties of the O-U process.

The paper describes two ways to estimate the parameters in the state process (for the spread):
<ol>
<li>Shumway and Stoffer (1982) smoother approach (offline)</li>
<li>Elliott and Krishnamurthy (1999) filter approach (online)</li>
</ol>
<h1 id="Notes">Notes</h1>
There seems to be some typos in the equations in the 2nd approach (the online algorithm) in the original publication.

&nbsp;

<h1 id="References">References</h1>
<ul>
<li><a class="ext-link" href="http://www.tandfonline.com/doi/pdf/10.1080/14697680500149370"><span class="icon">​</span>http://www.tandfonline.com/doi/pdf/10.1080/14697680500149370</a></li>
<li><a class="ext-link" href="http://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=QMF2004&amp;paper_id=138"><span class="icon">​</span>http://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=QMF2004&amp;paper_id=138</a></li>
<li><a class="ext-link" href="http://www-stat.wharton.upenn.edu/%7Esteele/Courses/434/434Context/PairsTrading/PairsTrading.html"><span class="icon">​</span>http://www-stat.wharton.upenn.edu/~steele/Courses/434/434Context/PairsTrading/PairsTrading.html</a></li>
</ul>
<h1 id="Code">Code</h1>
<ul>
<li><a href="http://redmine.numericalmethod.com/projects/public/repository/svn-algoquant/show/core/src/main/java/com/numericalmethod/algoquant/model/elliott2005" target="_blank">http://redmine.numericalmethod.com/projects/public/repository/svn-algoquant/show/core/src/main/java/com/numericalmethod/algoquant/model/elliott2005</a></li>
</ul>



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