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Algorithmic Trading in CDS and Equity Indices Using Statistical Arbitrage

Samuelsson, Melker and Ek, Tobias (2017) FMS820 20171
Mathematical Statistics
Abstract
Historical data shows a strong relationship between hourly changes in CDS index iTraxx
Main and equity futures EURO STOXX 50. We hypothesize that the relatively stable
relationship should allow us to trade the two markets. A Markov regime switching model
is introduced, distinguishing cointegrated regimes that allows the cointegration relation
ship to be switched on and off. A pairs trade between the two securities is carried out in
the cointegrated regimes. We show that trading exclusively in these regimes produces a
significantly better performance compared to static pairs trading over the whole data set.
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author
Samuelsson, Melker and Ek, Tobias
supervisor
organization
course
FMS820 20171
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Algorithmic Trading, CDS indices, Equity futures, Markov Regime Switch ing Models, Cointegration
language
English
id
8915554
date added to LUP
2017-06-14 15:18:33
date last changed
2017-06-15 08:00:52
@misc{8915554,
  abstract     = {Historical data shows a strong relationship between hourly changes in CDS index iTraxx
Main and equity futures EURO STOXX 50. We hypothesize that the relatively stable
relationship should allow us to trade the two markets. A Markov regime switching model
is introduced, distinguishing cointegrated regimes that allows the cointegration relation
ship to be switched on and off. A pairs trade between the two securities is carried out in
the cointegrated regimes. We show that trading exclusively in these regimes produces a
significantly better performance compared to static pairs trading over the whole data set.},
  author       = {Samuelsson, Melker and Ek, Tobias},
  keyword      = {Algorithmic Trading,CDS indices,Equity futures,Markov Regime Switch ing Models,Cointegration},
  language     = {eng},
  note         = {Student Paper},
  title        = {Algorithmic Trading in CDS and Equity Indices Using Statistical Arbitrage},
  year         = {2017},
}