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<FONT face=Arial color=#0000ff
size=2>Chuck,
Per
this morning's before the bell,"UBS
recommending buying Federated Department Stores (FD) and selling May
Department Stores (MAY) -- given
that the companies' strategies and <FONT face=Arial color=#0000ff
size=2>execution "are diverging to a greater extent that we can ever
recall,"
<FONT face=Arial color=#0000ff
size=2>How would your correlation methodology wiegh
in?
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>Regards,
<FONT face=Arial color=#0000ff
size=2>Bob
<FONT face=Tahoma
size=2>-----Original Message-----From: Chuck Rademacher
[mailto:chuck_rademacher@xxxxxxxxxx]Sent: Saturday, April 19, 2003
8:26 PMTo: amibroker@xxxxxxxxxxxxxxxSubject: [amibroker]
Pairs trading (an example)
I
just did a quick scan, looking for some new pairs to trade next
week.
<FONT face=Arial color=#0000ff
size=2>
My
method of calculating correlation (there is no real standard) shows IBM and
GENZ as being about 82% correlated. In the scheme of things, that means
that they are quite highly correlated.
<FONT face=Arial color=#0000ff
size=2>
My
method of calculating also shows that they have recently deviated from their
typical correlation enough that I will short IBM and buy GENZ at the next
open.
<FONT face=Arial color=#0000ff
size=2>
If
you look at the two charts, you will probably observe both the correlation and
the recent deviation from the correlation. It is not a science.
More of an art form. My pairs trading system shows that pair as
the best trade for next week. The system cannot tell me how long
it will take for the correlation to pop back in place or, indeed, if it ever
will. It will tell me when to quit the position, hopefully at a modest
profit. Pairs trading is not about home runs. It's
about slow, consistent equity growth with a very low ulcer index.
If both of those companies went down the drain <SPAN
class=113451803-20042003>or if the whole
market has a huge swing in either direction, I'm not
concerned.
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>CheersSend
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