Currently going through the book ' The Quants' by Scott Patterson and it has some wonderful strategies used by Quants on the Wall Street and how it almost broke the entire financial system. There are some good strategies if used with caution can help generate some returns.
In this blog we will try to study the relation between SBI & YESBANK to understand if the price anomalies between these stocks can be used to drive some meaningful trades.
Data set is from 1st Jan 2012 till 31st Dec 2012. Co-relation between both the stocks is +0.65 and as you can see from the graph below the relation is positive.
Positive co-relation of 0.65 means that any wide anomolies in the stock returns of both the companies can be exploited by shorting the stock of one and buying the stock of another. Over the time the market will stick to the long term relations.
Make sure you have enough liquidity to stay for time till the market settles to historic relations and also conduct some additional research before getting into these kind of trades since they need huge leverage and can wipe out the entire capital if not executed correctly.
statistical arbitrage india
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