Statistical Arbitrage and High-Frequency Data with an Application to Eurostoxx 50 Equities
31 Pages Posted: 1 Jun 2013 Last revised: 3 Jun 2013
Date Written: September 10, 2010
The motivation for this paper is to apply a statistical arbitrage technique of pairs trading to high-frequency equity data and compare its profit potential to the standard sampling frequency of daily closing prices. We use a simple trading strategy to evaluate the profit potential of the data series and compare information ratios yielded by each of the different data sampling frequencies. The frequencies observed range from a 5-minute interval, to prices recorded at the close of each trading day.
The analysis of the data series reveals that the extent to which daily data are cointegrated provides a good indicator of the profitability of the pair in the high-frequency domain. For each series, the in-sample information ratio is a good indicator of the future profitability as well.
Conclusive observations show that arbitrage profitability is in fact present when applying a novel diversified pair trading strategy to high-frequency data. In particular, even once very conservative transaction costs are taken into account, the trading portfolio suggested achieves very attractive information ratios (e.g. above 3 for an average pair sampled at the high-frequency interval and above 1 for a daily sampling frequency).
Keywords: High-frequency data, statistical arbitrage, pairs trading, cointegration, time adaptive models
JEL Classification: C00, C10, C50, G00, G11
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