Simple Strategy for Indian Market : 1
Long time back, I was through an interview process. The interviewer gave me a pair of equities to formulate a trading strategy.
I worked on it for a week and got a very simple strategy which should work on real market. However, by that time I had completely made my mind to stick to my organization. Yesterday, I made my mind to do further analysis of the strategy. To my surprise, it worked better than my expectation on my OpenOffice Calc. (I hate MS Excel as it does not come free with Windows OS)
I downloaded data for a pair of instruments which are very much correlated. Almost identical (Hint: One Sector Index future-A and another may be ETF-B).
A and B should move together. If A and B deviates, there is an opportunity.
This is a simple statistical arbitrage strategy.
Ra(t)= Return of A for last t days
Rb(t)= Return of B for last t days
Ra(T)= Return of A for next T days
Rb(T)= Return of B for next T days
th= Threshold (1,2 3 percentage)
If |Ra(t)-Rb(t)| exceeds ‘th’, we have signal to take position.
Long in A and short in B if sign(Ra(t)-Rb(t)) is -ve.
Result for last 4 years is like below: (With 0.5% transaction rate)
However, in market similar result may not be achievable. ETF has tracking error which may give false signal. There is also a limitation to investment amount as ETF is illiquid in Indian market.