– Stationarity and cointegration of time series
- Stationarity and mean-reversion: the practical benefits.
- Statistical test for stationarity and practical exercise
- Cointegration and its practical benefits.
- Cointegration vs correlation.
- Statistical test for cointegration and practical exercize
– Mean-reversion trading of pairs and triplets
- Finding hedge ratio through linear regression (LR).
- Order-dependence of hedge ratio based on LR.
- Finding hedge ratio through Johansen test.
- Case study: The breakdown of cointegration of GLD-GDX, the economic reasons and the remedy.
– Half-life of mean-reversion
- Practical importance of half-life.
- The Ornstein-Uhlenbeck formula.
– Risk management of mean-reversion strategies
– Index arbitrage
- Trading an ETF against a basket of its component stocks.
- Two ways of constructing a basket: linear regression and constrained optimization.
– Long-short portfolio
- Long-short portfolio strategy of stocks in the S&P 500.