Any comment on this backtest result for JPM/GS Pairs Trading?

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Any comment on this backtest result for JPM/GS Pairs Trading?

Maitreyi mandal

posted

Hi

I am trying to see performance of JPM/GS pairs trading, not to be confused, I have changed sid accordingly & my ticker1 is JPM & ticker2 is GS.

Any feedback for improvement?

3 responses

I suggest you to record the current value, mean (rolling window), +/- deviation (rolling window) of spread, rather than only zscore. Because zscore always looks very good, but what you really trade is spread. My experience is single pair can hardly achieve very good performance because there are lots of news on each stock in the pair. For example, JPM acquired Bear Stearns in 2008 and this event will have a large impact on stock price of JPM but not GS. It would be better if you diversify on lots of pairs to reduce risks on corporate news.

Simon Thornington

Indeed; my biggest trouble with finding any pair trading scheme that works is most of the mean reversion of the z-score is caused by the mean moving, not the spread reverting. I asked about this in https://www.quantopian.com/posts/model-slash-beta-slippage-in-dynamic-spread-mean-reversion-models but nobody had any thoughts. :)

Also, one important indicator for goodness of mean reversion strategy is lambda, or half-life of mean reversion. You can access more details about it in Ernest Chan's book Algorithmic Trading. Large absolute value of lambda, or small half-life means big profit and stable performance.

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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian.

In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.