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

20 Pages Posted: 15 May 2009 Last revised: 6 Dec 2010

Attilio Meucci

ARPM - Advanced Risk and Portfolio Management

Date Written: May 14, 2009

Abstract

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

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

Attilio Meucci (Contact Author)

ARPM - Advanced Risk and Portfolio Management ( email )

HOME PAGE: http://www.arpm.co/

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