Pair trading in Bovespa with a quantitative approach: cointegration, Ornstein-Uhlenbeck equation and Kelly criterion.

Pair trading is an old and well-known technique among traders. In this paper, we discuss an important element not commonly debated in Brazil: the cointegration between pairs, which would guarantee the spread stability. We run the Dickey-Fuller test to check cointegration, and then compare the results with non-cointegrated pairs. We found that the Sharpe ratio of cointegrated pairs is greater than the non-cointegrated. We also use the Ornstein-Uhlenbeck equation in order to calculate the half-life of the pairs. Again, this improves their performance. Last, we use the leverage suggested by Kelly Formula, once again improving the results.

Author dc:creator

• Teixeira, Ariel Amadeu Edwards

Advisor dc:contributor.advisor

• Silva, Moacyr Alvim Horta Barbosa da

• Cointegration
• Ornstein-Uhlenbeck equation
• Kelly criterion

Language dc:language.iso

eng

Handle dc:identifier.uri

https://hdl.handle.net/10438/11605

OAI identifier oai:identifier

oai:repositorio.fgv.br:10438/11605