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Review of Statistical Arbitrage, Cointegration, and Multivariate Ornstein-Uhlenbeck

Attilio Meucci


May 14, 2009

We introduce the multivariate Ornstein-Uhlenbeck and discuss how it generalizes a vast class of continuous-time and discrete-time multivariate processes. Relying on the simple geometrical interpretation of the dynamics of the Ornstein-Uhlenbeck process we introduce cointegration and its relationship to statistical arbitrage. We illustrate an application to swap contract strategies. Fully documented code illustrating the theory and the applications is available at MATLAB Central.

Number of Pages in PDF File: 20

Keywords: alpha, z-score, signal, half-life, vector-autoregression (VAR), moving average (MA), VARMA, stationary, unit-root, mean-reversion, Levy processes

JEL Classification: C1, G11

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Date posted: May 15, 2009 ; Last revised: December 6, 2010

Suggested Citation

Meucci, Attilio, Review of Statistical Arbitrage, Cointegration, and Multivariate Ornstein-Uhlenbeck (May 14, 2009). Available at SSRN: http://ssrn.com/abstract=1404905 or http://dx.doi.org/10.2139/ssrn.1404905

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Attilio Meucci (Contact Author)
SYMMYS ( email )
HOME PAGE: http://www.symmys.com
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