Statistical Arbitrage Team

Leo, Ying, Yandong, Xing

Agenda

• DebuggingSorry to disappoint, but that’s all we did…

Data

• Prices regenerated using CRSP’s adjusted returns

– Match Yahoo Finance prices for 5-6 randomly picked stocks– Several small consistency checks

» Input from all group members

• Want to match the 2 ways of computing prices– Almost there…

PCA Issues

• Preliminary experiment– Get minimum/maximum/mean volatility– Get sum of weights in the portfolios

• Debug the PCA code– What are the value ranges?– Include volatility in the calculation?– Portfolio weights should always add to one

PCA Eigenvector Weight Sums

Volatility

Volatility Histogram

Fig. 3 Experiment Comparison

50 100 150 200 250-0.2

-0.1

0

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Market Cap Weighted Portfolio

Eigen Portfolio

Mar-3-6 May-30-6 Aug-23-6 Nov-16-6 Feb-15-7 May-14-7 Aug-8-7-0.1

0

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0.6w/ norm, w/ /std

accu

mu

la

ted

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Pape

r’sCu

rren

tPr

evio

us

With and Without dividing by Volatility

Mar-3-6 May-30-6 Aug-23-6 Nov-16-6 Feb-15-7 May-14-7 Aug-8-7-0.2

-0.1

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0.7w/ norm, w/o /std

accu

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Mar-3-6 May-30-6 Aug-23-6 Nov-16-6 Feb-15-7 May-14-7 Aug-8-7-0.1

0

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0.6w/ norm, w/ /std

accu

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With

Div.

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atilit

yW

ithou

t Div.

Vol

atilit

y

PNL – Paper’s x Our ResultsPa

per’s

Our

s

PNL – Current x Previous Results

0 500 1000 1500 2000 2500

1

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x 108 Fund Value

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Dollars

Jan 02 1997

Jan 02 2007Prev

ious

Curr

ent

0 500 1000 1500 2000 2500

1

1.02

1.04

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x 108 Fund Value

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Dollars

Jan 02 1997

Jan 02 2007

PNL – Paper’s x Our ResultsPa

per’s

Curr

ent

Prev

ious

Trading – Debugging Plan• Debug!• Add transaction costs• Make sure it is market neutral• Compute Sharpe ratio• Display positions• Debug with “deterministic” dummy ETF/stock• Signals

– Are they generated correctly?• Merge experiments in single code base

ETFs – Action Plan

• We’ve started matching Stock with ETF– Using GICS as proxy

• Built dictionary• Only part of the Stocks have GICS code

– About ~1/2 of the securities

– Use another proxy (NAICS/SIC)?• Change Simulations to incorporate ETFs

– Straightforward once the rest is working

Suggestions?