A Pairs Trading Strategy for Goog/googl Using Machine Learning
نویسنده
چکیده
bag of related financial instruments to make profits by exploiting their relations. One important feature of pairs trading is that it is market-neutral, which is particularly appealing in the current volatile and unpredictable macro-economic environments. In this project, we will use the spread model, the O-U meanreverting model, and SVM to build a trading strategy and apply the strategy to GOOG/GOOGL. We will first illustrate the spread model and the O-U meanreverting in detail. Unlike most previous work that only takes price spread into consideration, we will also use the spread model and the O-U mean-reverting model to model the two securities' technical indicators. In other words, we extend the concept of ``spread'' by also investigating technical indicators' spread. We will construct trading signals by processing different kinds of ``spreads'' and then use these trading signals as input features for SVM classification. Instead of using the traditional back-testing method to test our trading strategy, we will use SVM binary classification to measure our trading strategy. To achieve that, we will reconstruct the original pricing feeds to labeled examples, and there are two methods we use to reconstruct the labeled examples, one for measuring the strategy's ability to seize profit opportunities, and the other for measuring the strategy's ability to make directional predictions. One important thing for a pairs trading strategy is to select a proper pair of financial instrucments. For example, if the price of security A always rises when the price of security B rises, it seems that A and B may be used for pairs trading. However, the explicit relation between prices may not be good enough for a good pair. The good pairs should share as many the same intrinsic characteristics as possible. GOOG/GOOGL are both shares of Google Inc. (nos Alphabet Inc.) but with different vote rights. GOOGL represents Class A shares while GOOG represents Class C shares. Only Class A shares have voting rights. Therefore, generally, the price of GOOGL is slightly higher than that of GOOG. Other than voting rights, they are essentially the same since their prices are based upon the same fundamentals. ð Jiayu Wu, [email protected] A PAIRS TRADING STRATEGY FOR GOOG/GOOGL USING MACHINE LEARNING
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