Evolutionary Arbitrage

37 Pages Posted: 15 Mar 2022

See all articles by Julio A. Crego

Julio A. Crego

Tilburg University

Jens Kvaerner

Tilburg University

Åvald Sommervoll

University of Oslo; Digital infrastructure and security

Dag Einar Sommervoll

Norwegian University of Life Sciences (NMBU); NTNU Business School

Niek Stevens

SIG-i Capital AG

Date Written: March 7, 2022

Abstract

The prices of exchange-traded funds (ETFs) can deviate significantly from their net asset values (NAVs). Exploiting such inefficiencies is often too costly because it involves taking positions in hundreds of underlying illiquid securities. We develop a method that identifies a liquid mimicking portfolio that tracks the NAV using only ETFs. Our method combines a genetic algorithm with non-negative least squares. We apply it to the fixed income ETF market. Our long-short strategy generates a Sharpe ratio of 4-5, incurs little transaction cost, and does well under all market conditions.

Keywords: Statistical Arbitrage, Mimicking Portfolio, Corporate bond ETFs, Evolutionary algorithms

Suggested Citation

Crego, Julio and Kvaerner, Jens and Sommervoll, Åvald Åslaugson and Sommervoll, Dag Einar and Stevens, Niek, Evolutionary Arbitrage (March 7, 2022). Available at SSRN: https://ssrn.com/abstract=4051930 or http://dx.doi.org/10.2139/ssrn.4051930

Julio Crego

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

Jens Kvaerner (Contact Author)

Tilburg University ( email )

Warandelaan 2
Tilburg, -- 4818HK
Norway
40242704 (Phone)
0364 (Fax)

HOME PAGE: http://www.jenskvaerner.com/

Åvald Åslaugson Sommervoll

University of Oslo ( email )

P.O box 1080
Oslo
Norway

Digital infrastructure and security ( email )

P.O box 1080
Oslo
Norway

Dag Einar Sommervoll

Norwegian University of Life Sciences (NMBU) ( email )

As
As
Oslo, Norway, 1432
Norway

NTNU Business School ( email )

Norway

Niek Stevens

SIG-i Capital AG ( email )

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