Review of Statistical Arbitrage, Cointegration, and Multivariate Ornstein-Uhlenbeck
20 Pages Posted: 15 May 2009 Last revised: 6 Dec 2010
Date Written: 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.
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
Suggested Citation: Suggested Citation