yahqq strategy...ma45 98034 ma50 88308 out-of sample test ma5 ma10 ma15 ma20 ma25 ma30 ma35 ma40...

L/O/G/O

e Zhao

nnum ureshi

Jingwei an

Rachel Yue iu

YAHQQ

Strategy

Today’s agenda

• Introduction

• Stock picking

• Yahqq strategy process

• Testing result

• Risk analysis

• Conclusion

Hedge ratio and correlation

Pairs Trading defined

• a market neutral trading strategy enabling traders to profit from virtually any market conditions: uptrend, downtrend, or sideways movement.

• one stock moves up while the other moves down, the pairs trade would be to short the outperforming stock and to long the underperforming one, betting that the "spread" between the two would eventually converge

Moving Average(MA)

• An indicator frequently used in technical analysis showing the average value of a security's price over a set period.

• emphasize the direction of a trend and to smooth out price and volume fluctuations

• upward momentum is confirmed when a short-term average crosses above a longer-term average. Downward momentum is confirmed when a short-term average crosses below a long-term average

YAHQQ Strategy

• Pairs trading based on MA technique

• Spread converge signal: BUY spread

• Spread diverge signal: SELL spread

Spread<-stk1-hr*stk2

BUY spread: buy stk1, sell stk2

SELL spread: sell stk1, buy stk2

YAHQQ Strategy Process

7 pairs stocks

Compare each

spread with its

MA

Converge: BUY

spread

Diverge: SELL

spread

Continue process

Decide the trading signal

Decide trading quantity

Put into P nL function

Comparing each spread with its

MAs

• Converge signal

• boolB5[i, j]<-matrix(maN5[i-

2,j]<spreadN5[[j]][[i-2]] & maN5[i-

1,j]>spreadN5[[j]][[i-1]])

• Diverge Signal

• boolS5[i, j]<-matrix(maN5[i-

2,j]>spreadN5[[j]][[i-2]] & maN5[i-

1,j]<spreadN5[[j]][[i-1]])

Buy/Sell/Hold decision matrix

if(boolB5[i,j]){pos5[i,j]<-1}

else if (boolS5[i,j]){pos5[i,j]<--1}

else{pos5[i,j]<-0}

GS vs. JPM

HD vs. LOW

DRI vs. CAKE

T vs. VZ

KO vs. PEP

JNJ vs.PG

CMI vs. CAT

Quantity function

• mph1<-mean(head(stks1,30))

• mph2<-mean(head(stks2,30))

• mpt1<-mean(tail(stks1,30))

• mpt2<-mean(tail(stks2,30))

• mp1<-(mph1+mpt1)/2

• mp2<-(mph2+mpt2)/2

• qty1<-100*round((100000/mp1)/100)

• qty2<-100*round((100000/mp2)/100)

• qty<-c(qty1,qty2)

Backtesting and Forward Performance

Out-Of-Sample

Test

In-Sample

Test

Backtesting

In-Sample Test

Out-Of-Sample Test

Forward Performance(Simulation)

Today

07-01-01 to

08-01-01 09-01-01 to

11-01-01

11-01-01 to

12-01-01

In-Sample PNL Test

In-Sample PNL Test

In-Sample PNL Test

Out-Of-Sample PNL Test

Out-Of-Sample PNL Test

BackTesting

BackTesting

BackTesting

Simulation PNL

Simulation PNL

L/O/G/O

Risk Measurement

Tools used for risk

Assessment

• Sharpe ratio

• Treynor ratio

• Max Drawdowns

• Beta

• Volatility

IN-SAMPLE RESULTS

GS JPM HD LOW DRI CAKE T VZ KO PEP JNJ PG CMI CATGM

BETA 1.53 2.12 0.98 1.06 1.03 1.03 1.49 0.66 0.59 0.49 0.48 0.43 0.56 1.92

MAX DRAWDOWN 130.6 31 18.3 14.55 26.89 26.49 9.3 11.5 29.46 23.42 19.64 22.49 92.01 72.02

MA5 MA10 MA15 MA20 MA25 MA30 MA35 MA40 MA45 MA50

Sharpe Ratio 1.15 3.56 3.44 2.06 2.84 0.93 0.925 1.1 2.07 1.25

Treynor Ratio 26.8 53.11 57.1 38 28.2 21.6 12.2 15.1 16.1 23.2

THE BEST MA (RISK

ANALYSIS)

PORTFOLIO (MA 15)

BETA 1.06

VOLATALITY 28%

MAXD (PRICE) 37.69

MAX DD

MA 5 115552

MA10 102744

MA15 75634

MA20 69360

MA25 154119

MA30 82498

MA35 125360

MA40 121282

MA45 98034

MA50 88308

OUT-OF SAMPLE TEST

MA5 MA10 MA15 MA20 MA25 MA30 MA35 MA40 MA45 MA50

Sharpe Ratio 2.63 0.66 2.34 1.42 0.886 0.58 0.92 2.77 2.17 0.78

Treynor Ratio 29.4 7.38 22.7 -12.4 15.8 0.208 6.9 29 7.5 21.2

GS JPM HD LOW DRI CAKE T VZ KO PEP JNJ PG CMI CATGM

BETA 1.30 1.48 0.86 0.84 0.83 1.06 0.61 0.60 0.59 0.58 0.46 0.59 1.64 1.42

MAX DRAWDOWN 85.44 18.52 14.4 8.79 11.86 9.87 4.7 7.35 10.42 10.77 10.56 8.86 39.29 43.9

Testing MA 15

PORTFOLIO (MA 15)

BETA 0.91

VOLATALITY 12%

MAXD (PRICE) 20.34

MAX DD

MA 5 103141

MA10 82451

MA15 61544

MA20 68174

MA25 81835

MA30 79494

MA35 67058

MA40 59208

MA45 76500

MA50 75400

L/O/G/O

Thank You!

Yahqq