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Estimation of Performance and Execution Time Effect on High-Frequency Statistical Arbitrage Strategies

Ivilina Popova and Elmira Popova
The Journal of Trading Spring 2010, 5 (2) 23-30; DOI: https://doi.org/10.3905/JOT.2010.5.2.023
Ivilina Popova
is an associate professor at the department of finance and economics, McCoy College of Business Administration, Texas State University in San Marcos, TX.
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  • For correspondence: ip12@txstate.edu
Elmira Popova
is a professor in Operations Research and Industrial Engineering at The University of Texas in Austin, TX.
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  • For correspondence: elmira@mail.utexas.edu
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Abstract

This article is designed to help quantify one of the “slippages” that are often recognized in quant strategies. The idea is that whenever the actual executed prices are away (both time and size) from the model prices, the realized returns suffer. The slippage for a particular statistical arbitrage strategy is quantified. It is shown that a portion of the loss is due to using different prices for estimating the parameters of the strategy. The main source of the loss is the use of intraday in place of market on close prices. Five years of intraday transaction data from the NYSE TAQ database are used. Analysis shows that on average the daily loss due to intraday prices accounts for 0.03% of the initial capital. For the period 2003 through 2006, the accumulated loss is approximately 30%. The described approach can be of use to new quantitative analysts who create and backtest trading strategies. It could also be used during the due diligence process of a fund that is interested in investing in a statistical arbitrage strategy. This article recommends requiring that a backtest be done by using intraday and market on close prices in order to identify the size of such loss.

TOPICS: Statistical methods, volatility measures

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The Journal of Trading: 5 (2)
The Journal of Trading
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Spring 2010
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Estimation of Performance and Execution Time Effect on High-Frequency Statistical Arbitrage Strategies
Ivilina Popova, Elmira Popova
The Journal of Trading Mar 2010, 5 (2) 23-30; DOI: 10.3905/JOT.2010.5.2.023

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Estimation of Performance and Execution Time Effect on High-Frequency Statistical Arbitrage Strategies
Ivilina Popova, Elmira Popova
The Journal of Trading Mar 2010, 5 (2) 23-30; DOI: 10.3905/JOT.2010.5.2.023
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  • Article
    • Abstract
    • TRANSFORMING A THEORETICAL IDEA INTO A DYNAMIC TRADING STRATEGY
    • EMPIRICAL BACKTEST USING EQUALLY WEIGHTED PORTFOLIOS
    • ESTIMATE ON INTRADAY “SNAPSHOT” PRICE AND EXECUTE ON CLOSE
    • CONCLUSION
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