Free module · Systematic strategy development
Statistical Arbitrage: Relative Value to Tradable Portfolios
Define the relationship, estimate the residual, and find out whether convergence survives implementation.
pairs · residuals · cointegration · baskets · structural breaks
The building blocks
Relative-value trading asks whether a relationship between assets may normalize. First understand the two cash positions; then model their spread and possible failure.
- Calculate two-leg profit and costs
- Estimate a hedge and inspect its residual
- Test convergence, timing and capacity
Lessons in this module
- What statistical arbitrage is—and where it applies
- Construct the spread: price ratios, log ratios and executable units
- Cointegration, reversion speed and structural breaks
- Causal z-scores and a complete entry–exit state machine
- From pairs to residual baskets and factor neutrality
- Two-leg backtesting, borrow, capacity and ML extensions
Practice and apply
- Find the convergence hurdle — Gain $120, loss $180, total cost $12.
- Translate the residual into cash P&L — Long 100 shares of A, short 200 of B. A falls $1 and B falls $1.
Work through the practice exercises · Quant development tools