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arXiv · 1405.2384

A Multi-factor Adaptive Statistical Arbitrage Model

Wenbin Zhang·Zhen Dai·Bindu Pan·Milan Djabirov
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Abstract

This paper examines the implementation of a statistical arbitrage trading strategy based on co-integration relationships where we discover candidate portfolios using multiple factors rather than just price data. The portfolio selection methodologies include K-means clustering, graphical lasso and a combination of the two. Our results show that clustering appears to yield better candidate portfolios on average than naively using graphical lasso over the entire equity pool. A hybrid approach of using the combination of graphical lasso and clustering yields better results still. We also examine the effects of an adaptive approach during the trading period, by re-computing potential portfolios once to account for change in relationships with passage of time. However, the adaptive approach does not produce better results than the one without re-learning. Our results managed to pass the test for the presence of statistical arbitrage test at a statistically significant level. Additionally we were able to validate our findings over a separate dataset for formation and trading periods.

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Wenbin Zhang, Zhen Dai, Bindu Pan, Milan Djabirov. 2014-05-10. A Multi-factor Adaptive Statistical Arbitrage Model. https://arxiv.org/abs/1405.2384

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