Strategy Library Addition: Optimal Pairs Trading through Ornstein-Uhlenbeck modeling

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Hi Everyone,

In this strategy, we model a Pairs Trading Process as an Ornstein-Uhlenbeck Process in order to derive the Optimal Entry and Liquidation values. I had the chance to ask the co-author of this strategy, Professor Leung, the Director of the CFRM department at the University of Washington (which is where I am attending right now), for help on this strategy. I will attach a backtest, and the full writeup can be found here. Furthermore, this one comes with a video walkthrough! The URL for the video can be found on the page linked earlier or here.

Best,
Shile Wen

Update Backtest






The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.



 
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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.


Great work! I think this is my favourite addition to the library so far!

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Hey Shile, this is awesome!

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Nice!

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Interesting study, how is it possible to extend OU optimization to a meanreverting portfolio ? Maybe it could be usefull if you can upgrade library mlfinlab that have this feature ?

https://mlfinlab.readthedocs.io/en/latest/optimal_mean_reversion/ou_model.html

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Hi Quant Stratege,

It is definitely possible to extend this to a portfolio, so we would need to have the portfolio values be a linear combination of more than just two time-series of price data. However, please note optimization runtime tends to be O(k^n), so it might take much longer when more equities are involved. Furthermore, I have seen the mlfinlab post, and it is possible to use it to re-implement this strategy (QC would need to update our mlfinlab version first however) using this method.

Best,
Shile Wen

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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.


Update Backtest





0

The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.


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