The application of Ornstein-Uhlenbeck Process model and ARCH/GARCH model in statistical arbitrage

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: Statistical arbitrage is widely used in the quantitative based trading strategies. In this paper, we mainly use Ornstein-Uhlenbeck (O-U) process model and the GARCH model to estimate the parameters and verify trading signals for the statistical arbitrage. In addition, a new model is created through the combination of O-U model and GARCH model. To estimate the models, HuangXia Bank and Industrial Bank are selected due to the highest correlation among the banks.

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