Timeline for Correct calculation of returns from a pairs trade
Current License: CC BY-SA 4.0
6 events
| when toggle format | what | by | license | comment | |
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| Sep 8, 2022 at 6:34 | comment | added | labrynth | Thank you for the clarification. Perhaps you could include that in your response. Thanks again. | |
| Sep 8, 2022 at 6:27 | comment | added | nbbo2 | The change in spread is not the return on the trade, but it is an approximation because it is the difference of two logs each of which is approximation of the returns of the stock positions. I don't have the Vidyamurthy book, so I am not sure if this is what he had in mind. The return is generally computed as the dollar profit/loss divided by the equity or capital at time t. | |
| Sep 7, 2022 at 23:29 | comment | added | labrynth |
There seems to be an error here: total logreturn on pairs trade: logreturn on stock A + logreturn on stock B = log((price_At+1*price_Bt+1)/(price_At*price_Bt)) Therefore this is not equal to spreadt+1 - spreadt If I'm correct then how are return of pairs trade computed? Could you please clarify this. Thanks in advance.
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| May 12, 2020 at 10:05 | vote | accept | user2145312 | ||
| May 12, 2020 at 9:52 | history | edited | nbbo2 | CC BY-SA 4.0 |
added 151 characters in body
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| May 12, 2020 at 9:46 | history | answered | nbbo2 | CC BY-SA 4.0 |