Ultra High Frequency Statistical Arbitrage Across International Index Futures

42 Pages Posted: 28 Feb 2013

See all articles by Hamad Alsayed

Hamad Alsayed

University of Southampton - School of Management

Frank McGroarty

University of Southampton - Southampton Business School

Date Written: February 20, 2013

Abstract

We show that exploitable lead-lag relations of the order of a few hundred milliseconds exist in the three pairings between the S&P 500, FTSE 100, and DAX futures contracts. These relations exhibit clear intra-daily patterns, particularly around the US open, the European close, and the announcement of macroeconomic data. Using this information, we forecast mid-quote changes in lagging contracts with a directional accuracy in excess of 85%. A simple statistical arbitrage strategy exploiting these relations yields economically significant profits which are robust to market impact costs and the bid-ask spread. However, returns are sensitive to the risk of slippage, and the most profitable trading opportunities rarely exist for longer than 300 milliseconds. Hence, we highlight price slippage and infrastructure costs as the most significant limits to arbitrage in this market setting. Overall, our results accord with the view that informational inefficiencies incentivize arbitrageurs to appropriate pricing anomalies.

Keywords: lead-lag relationships, futures markets, Hayashi-Yoshida cross correlation estimator, statistical arbitrage

JEL Classification: F36, G14, G15

Suggested Citation

Alsayed, Hamad and McGroarty, Frank, Ultra High Frequency Statistical Arbitrage Across International Index Futures (February 20, 2013). Available at SSRN: https://ssrn.com/abstract=2225753 or http://dx.doi.org/10.2139/ssrn.2225753

Hamad Alsayed (Contact Author)

University of Southampton - School of Management ( email )

Highfield
Southampton S017 1BJ, Hampshire SO17 1BJ
United Kingdom

Frank McGroarty

University of Southampton - Southampton Business School ( email )

Southampton, SO17 1BJ
United Kingdom

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