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Pairs Trading with Copulas

POSTED BY: Jonathan Kinlay
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Rick Jarosh
Rick Jarosh
Posted 8 years ago

Here is a pdf of the same notebook:

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POSTED BY: Rick Jarosh
Rick Jarosh
Rick Jarosh
Posted 8 years ago

Here is a notebook that expalins how to code asymmetric Gaussian copulas in explicit detail:

Note: Updated the notebook to refer to c as a copula density, rather than a copula, the latter not being precisely correct.

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POSTED BY: Rick Jarosh

enter image description here - Congratulations! This post is now a Staff Pick! Thank you for your wonderful contributions. Please, keep them coming!
POSTED BY: EDITORIAL BOARD

Excellent post Jonathan. Looking forward to similar ones in the near future. I have a question regarding the calculation of the returns. For example, the S&P 500 on February 1, 2010 was 1089.19 and on the next day it increased to 1103.32 but when applying the original formula the log return is -0.0128895. Shouldn't the formula be reversed? Is my reasoning correct or am I missing something? Thanks in advance for the clarification.
POSTED BY: Ruben Garcia Berasategui

http://jonathankinlay.com/2017/01/copulas-risk-management/

Copulas in Risk Management on Page 4 has:

SP500returns = 
  Log[Drop[SP500prices[[All, 2]], 1]] - 
   Log[Drop[SP500prices[[All, 2]], -1]];
NASDAQreturns = 
  Log[Drop[NASDAQprices[[All, 2]], 1]] - 
   Log[Drop[NASDAQprices[[All, 2]], -1]];

Instead of (Drop -1) Minus (Drop 1)
POSTED BY: Christopher French
Rick Jarosh
Rick Jarosh
Posted 8 years ago

Great post. It is possible to define copulas with higher degrees of asymmetry than the Clayton, Frank or Gumbel-Howard varieties by taking [Theta] in the normal copula to be a function of space rather than a constant:

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POSTED BY: Rick Jarosh
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