Poor man’s pairs trading…

April 11, 2010
By

(This article was first published on Stats raving mad » R, and kindly contributed to R-bloggers)

There is a central notion in Time Series Econometrics, cointegration. Loosely it refers to finding the long run equilibrium of two non-stationary series. As the most know non-stationary series examples comes from finance, cointegration is nowadays a tool for traders (not a common one though!). They use it as the theory behind pairs trading (aka Statistical Arbitrage).

In the following lines we use a simple pairs trading technique, studying the ratio of the two price evolution series. We use the New York versions of two of the greatest players in ATHEX, NBG and OTE.

stock <- "NBG"
stock1 <- "OTE"
start.date <- "2003-10-20"
end.date <- Sys.Date()
quote <- paste("http://ichart.finance.yahoo.com/table.csv?s=",
 stock,
 "&a=", substr(start.date,6,7),
 "&b=", substr(start.date, 9, 10),
 "&c=", substr(start.date, 1,4),
 "&d=", substr(end.date,6,7),
 "&e=", substr(end.date, 9, 10),
 "&f=", substr(end.date, 1,4),
 "&g=d&ignore=.csv", sep="")
quote1 <- paste("http://ichart.finance.yahoo.com/table.csv?s=",
 stock1,
 "&a=", substr(start.date,6,7),
 "&b=", substr(start.date, 9, 10),
 "&c=", substr(start.date, 1,4),
 "&d=", substr(end.date,6,7),
 "&e=", substr(end.date, 9, 10),
 "&f=", substr(end.date, 1,4),
 "&g=d&ignore=.csv", sep="")
dataNBG.l <- read.csv(quote, as.is=TRUE)
dataOTE.l <- read.csv(quote1, as.is=TRUE)
X2=dataOTE.l[order(dataOTE.l$Date),];Y2=dataNBG.l[order(dataNBG.l$Date),]


Now, let’s plot the ratio of the two. We locate a traing opportunity when there is an exceedence of the 2sigmas. Then we go short on the OTE and long on the NBG and close the positions on when the ratio is approaching the mean.

par(mfrow=c(1,1),fg = gray(0.7), bty="7")
plot(X2$Close,ylim=c(0,max(X2$Close)),ylab="Price",type="l")
lines(Y2$Close,col="red");grid()
lines(X2$Close/Y2$Close,col="green")

pairt=X2$Close/Y2$Close
abline(h=mean(pairt)+c(-2:2)*sd(pairt),col=c("black","purple"))
abline(h=mean(pairt),col="red")

Looking at the above there was a opportunity to start a pair trading at the end of the 2009…

X2$Date[which(abs(pairt-mean(pairt))>2*sd(pairt))]
#   [1] "2008-11-19" "2008-11-20" "2008-11-21" "2008-12-01" "2008-12-02"
#   [6] "2008-12-03" "2008-12-04" "2008-12-05" "2008-12-08" "2008-12-09"
#  [11] "2008-12-10" "2008-12-11" "2008-12-12" "2008-12-15" "2008-12-16"
#  [16] "2008-12-17" "2008-12-18" "2008-12-19" "2008-12-22" "2008-12-23"
#  [21] "2008-12-24" "2008-12-26" "2008-12-29" "2008-12-30" "2008-12-31"
#  [26] "2009-01-02" "2009-01-05" "2009-01-06" "2009-01-07" "2009-01-08"
#  [31] "2009-01-09" "2009-01-12" "2009-01-13" "2009-01-14" "2009-01-15"
#  [36] "2009-01-16" "2009-01-20" "2009-01-21" "2009-01-22" "2009-01-23"
#  [41] "2009-01-26" "2009-01-27" "2009-01-28" "2009-01-29" "2009-01-30"
#  [46] "2009-02-02" "2009-02-03" "2009-02-04" "2009-02-05" "2009-02-06"
#  [51] "2009-02-09" "2009-02-10" "2009-02-11" "2009-02-12" "2009-02-13"
#  [56] "2009-02-17" "2009-02-18" "2009-02-19" "2009-02-20" "2009-02-23"
#  [61] "2009-02-24" "2009-02-25" "2009-02-26" "2009-02-27" "2009-03-02"
#  [66] "2009-03-03" "2009-03-04" "2009-03-05" "2009-03-06" "2009-03-09"
#  [71] "2009-03-10" "2009-03-11" "2009-03-12" "2009-03-13" "2009-03-16"
#  [76] "2009-03-17" "2009-03-18" "2009-03-19" "2009-03-20" "2009-03-23"
#  [81] "2009-03-24" "2009-03-25" "2009-03-26" "2009-03-27" "2009-03-30"
#  [86] "2009-03-31" "2009-04-01" "2009-04-02" "2009-04-03" "2009-04-06"
#  [91] "2009-04-07" "2009-04-08" "2009-04-09" "2009-04-13" "2009-04-14"
#  [96] "2009-04-15" "2009-04-16" "2009-04-17" "2009-04-20" "2009-04-21"
# [101] "2009-04-22" "2009-04-23" "2009-04-24" "2009-04-27"

To leave a comment for the author, please follow the link and comment on his blog: Stats raving mad » R.

R-bloggers.com offers daily e-mail updates about R news and tutorials on topics such as: visualization (ggplot2, Boxplots, maps, animation), programming (RStudio, Sweave, LaTeX, SQL, Eclipse, git, hadoop, Web Scraping) statistics (regression, PCA, time series, trading) and more...



If you got this far, why not subscribe for updates from the site? Choose your flavor: e-mail, twitter, RSS, or facebook...

Tags: , , , , , , ,

Comments are closed.