Control charts for arbitrage-based trading
4. Conclusions and Further Research
Since a symmetry of assumptions in Pairs-trading and Statistical Process Control literature is evident, one can straightforward conclude that SPC techniques can be effectively used in the pairs trading context. In the case of co-integrating assets, examined in this study, the use of the traditional residuals chart was proven to be more effective in identifying tradable periods than that of Bollinger Bands, the technical analysis tool which is usually used to trigger potential trades. Although this study is quite limited, it introduces a new area of research for the SPC scholars. The adjustment of SPC tools and theory to account for financial data and more specifically the use of these tools in the decision making process for traders employing relative-value statistical arbitrage trading techniques such as pairs-trading is a promising area of investigation.
The conclusions drawn from this study are to be substantiated further in a new study using real data, closing share prices. Furthermore, the use of all the control charts mentioned in the study (combined Shewhart-EWMA and
Residuals Control Chart
of the proposed charts, when used in the Pairs-trading context, that will eventually lead to the selection of the most appropriate charts to be used as trading decision making tools. Another issue to be investigated in the future is the use of control charts for detecting mean reverting segments of non-stationary processes.
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