Making Money with statistical Arbitrage: Generating Alpha in sideway Markets with this Option Strategy
Bachelor Thesis from the year 2010 in the subject Business economics - Investment and Finance, University of Frankfurt (Main), language: English, abstract: In the following bachelor’s thesis I am going to present a short survey of the hedge fund industry, its regulation and the existent hedge fund strategies. Especially statistical arbitrage is explained in further detail and major performance measurement ratios are presented. In the second part, I am going to introduce a semi-variance model for statistical arbitrage. The model is compared to the standard Garch model, which is so often used in daily option trading, derivate pricing and risk management. Because investment returns are not equally distributed over time, sources for statistical arbitrage occur. The semi-variance model takes skewness into account and provides higher returns at lower volatility than the Garch model. The concept is aimed to be a synopsis of mean reversion and chart pattern detection. The computer model is generated with respect to Brownian motion and technical analysis and provide significant returns to the investment. As market efficiency hypothesis states the impossibility of arbitrage opportunities over the long run, on the other hand market anomalies significantly outstand. Connecting both elements creates a profitable trading system. The combination of both approaches delivers a sensible hedge fund concept. The out-ofsample backtest verifies out-performance and implies the need for further research in the area of higher moment CAPM and additional market timing strategies as sources of statistical arbitrage.
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30 Days backtest BaFin BE/ME Bera test BNP Paribas bonds Burke-ratio Call Call Put Call Put Put chart pattern Content description CSFB currency EFAMA emerging market expected shortfall f d i i Fama Figure Fixed Income Arbitrage forecast future Garch model hedge fund industry hedge fund managers hedge fund strategies higher historical data Ikenberry Index investors Jarque and Bera Journal of Business Journal of Finance Lakonishok leverage long short short Long/Short Equity lower semi-variance management company Market Efficiency market neutral maximum drawdown mean reverting mergers negative normal distribution Option spread Osler out-of-sample outperformance Overview payoff performance fee performance measurement ratios portfolio prediction profit put option semi-variance model short positions Short selling short short long skew Special fund standard deviation statistical arbitrage statistical arbitrage opportunities stock prices technical analysis trading rules trading strategy underlying upside-potential-ratio Value at Risk variance volatility Wiener process α α α τ τ