The vector autoregression (VAR) framework is common in econometrics for modelling correlated variables with bi-directional relationships and feedback loops. If you google “vector autoregression” you’ll find all sorts of academic papers related to modelling the effects of monetary and fiscal policy on various aspects of the economy. This is only of passing interest to traders. […]

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Way back in November 2007, literally weeks after SPX put in its pre-GFC all-time high, Friedman, Hastie and Tibshirani published their Graphical Lasso algorithm for estimation of the sparse inverse covariance matrix. Are you suggesting that Friedman and his titans of statistical learning somehow caused the GFC by publishing their Graphical Lasso algorithm? Not at […]

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In the first three posts of this mini-series on pairs trading with Zorro and R, we: Implemented a Kalman filter in R Implemented a simple pairs trading algorithm in Zorro Connected Zorro and R and exchanged data between the two platforms In this fourth and final post, we’re going to put it all together and […]

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In the last two posts, we implemented a Kalman filter in R for calculating a dynamic hedge ratio, and presented a Zorro script for backtesting and trading price-based spreads using a static hedge ratio. The goal is to get the best of both worlds and use our dynamic hedge ratio within the Zorro script. Rather […]

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In our previous post, we looked into implementing a Kalman filter in R for calculating the hedge ratio in a pairs trading strategy. You know, light reading… We saw that while R makes it easy to implement a relatively advanced algorithm like the Kalman filter, there are drawbacks to using it as a backtesting tool. […]

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This Kalman Filter Example post is the first in a series where we deploy the Kalman Filter in pairs trading. Be sure to follow our progress in Part 2: Pairs Trading in Zorro, and Part 3: Putting It All Together. Anyone who’s tried pairs trading will tell you that real financial series don’t exhibit truly […]

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When tinkering with trading ideas, have you ever wondered whether a certain variable might be correlated with the success of the trade? For instance, maybe you wonder if your strategy tends to do better when volatility is high? In this case, you can get very binary feedback by, say, running backtests with and without a […]

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One of the biggest wins we have at Robot Wealth is in helping aspiring traders see the markets, and profitable trading, for what it really is. Rather than utilising a tried and tested approach that has generated real money in the markets, in practice, many aspiring traders gravitate to seemingly exciting approaches with the weakest […]

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Some price series are mean reverting some of the time, but it is also possible to create portfolios which are specifically constructed to have mean-reverting properties. Series that can be combined to create stationary portfolios are called cointegrating, and there are a bunch of statistical tests for this property. We’ll return to these shortly. While […]

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The Federal Reserve publishes the yield-to-maturity of US Treasury bonds. However, the actual returns earned by investors are not publicly available. Nor are they readily and intuitively discerned from historical yields, since “a bond’s return equals its yield only if its yield stays constant and if all coupons (cash payments) are reinvested at that same […]

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