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Hi Everyone,
In this strategy, we model a Pairs Trading Process as an Ornstein-Uhlenbeck Process in order to derive the Optimal Entry and Liquidation values. I had the chance to ask the co-author of this strategy, Professor Leung, the Director of the CFRM department at the University of Washington (which is where I am attending right now), for help on this strategy. I will attach a backtest, and the full writeup can be found here. Furthermore, this one comes with a video walkthrough! The URL for the video can be found on the page linked earlier or here.
Best,
Shile Wen
Aaron Janeiro Stone
Great work! I think this is my favourite addition to the library so far!
Jovad Uribe
Hey Shile, this is awesome!
Stan M
Nice!
Quant Stratege
Interesting study, how is it possible to extend OU optimization to a meanreverting portfolio ? Maybe it could be usefull if you can upgrade library mlfinlab that have this feature ?
https://mlfinlab.readthedocs.io/en/latest/optimal_mean_reversion/ou_model.html
Shile Wen
Hi Quant Stratege,
It is definitely possible to extend this to a portfolio, so we would need to have the portfolio values be a linear combination of more than just two time-series of price data. However, please note optimization runtime tends to be O(k^n), so it might take much longer when more equities are involved. Furthermore, I have seen the mlfinlab post, and it is possible to use it to re-implement this strategy (QC would need to update our mlfinlab version first however) using this method.
Best,
Shile Wen
Shile Wen
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