Financial econometrics and statistical arbitrage
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Financial Econometrics and Statistical Arbitrage. Master of Science Program in Mathematical Finance New York University Homework 3 Due on Monday Nov. 7 th , 2005 (Two Weeks) Fall 2005. 70. 60. 50. 40. 30. 20. 10. 0. -10. 0. 100. 200. 300. 400. 500. 600. 700. 800. 900.

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Financial Econometrics and Statistical Arbitrage

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Financial econometrics and statistical arbitrage

Financial Econometrics and Statistical Arbitrage

Master of Science Program in Mathematical Finance

New York University

Homework 3

Due on Monday Nov. 7th, 2005

(Two Weeks)

Fall 2005


Financial econometrics and statistical arbitrage

70

60

50

40

30

20

10

0

-10

0

100

200

300

400

500

600

700

800

900

1000

Homework 3

Problem 1:

Consider the daily stock prices of two companies A and B (Stocks.xls). Use the Engle-Granger Method and show that the stock prices are cointegrated.

Find the cointegration vector. (80% of the score)

Problem 2:

Design a pairs trading strategy based on your cointegration vector and assuming transaction cost for each trade is $5.00, find the approximate optimal trading thresholds as in Lecture 5*. (15% of the score)

Problem 3: Obtain the mean-reversion speed*. (5% of the score)

* Use Monte Carlo Simulation


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