Bug in popular quantopian future pairs trading algo

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Bug in popular quantopian future pairs trading algo

João Aparício

posted Oct 7, 2017

Hi guys,

I recently posted some thoughts here about a popular futures pair trading algorithm. I took a popular pairs trading algorithm from quantopian and backtested it with different parameters. I remarked that it was suspicious that the algorithm results depended so strongly on small changes in the algorithm parameters.

I found the reason for it. That algorithm has a bug on it. In the calculation of zscore,

zscore = (np.mean(spreads[-context.short_ma]) - np.mean(spreads)) / np.std(spreads, ddof=1)

it should be np.mean(spreads[-context.short_ma:]). Instead of computing the zscore of short_ma return to long_ma returns, that algorithm is computing the zscore of a single day return, a day "short_ma days ago". Predicting anything with this is luck, that is why the algorithm is so sensitive to parameters. You can see the bug here and here.

The algorithm's behavior is a lot less attractive now because there aren't many entry points.

Note, there might also be a np.sqrt(short_ma) missing, but that's less important as people are going to be playing around with the entry threshold anyway.

2 responses

tumbleweed

I guess this result makes the tutorial more realistic though.

Maxwell Margenot

Oh! Good catch. I'll be sure to update the algo.

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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.

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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.