Advanced Pairs Trading: Intro to the Copula Approach

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The concept of copula has been widely used in risk management and CDO pricing since the 90s. However, applications for capturing pairs trading arbitrage is relatively novel.
For this talk, we will go through the basic concepts of copula for a pairs trading application, underlying assumptions, trading signal generation, and some common fallacies. We will cover two commonly adopted approaches: using prices series and returns series.
Go-to-market faster than ever with ArbitrageLab, a python library that provides institutional-grade pairs trading algorithms to traders.
* Presentation: docs.google.com/presentation/...
* Copula for Pairs Trading: A Detailed, But Practical Introduction: hudsonthames.org/copula-for-p...

[@Silver1980love]

It is a good idea to use example with R or python. Copula is complex model and example will make it easy.

[@bryan-9742]

it doesn't seem obvious at all why anyone would want to use strategy 2. The very fact it's behaving like a martingale defeats the point of mean reversion that one would want in the spread. Also, what's the point of the flexibility if the the very point of designing the strategy was to execute on a pairs trading strategy that mean - reverts. Seems like a waste of time for both strategy 1 and 2. Still a very informative piece! I appreciate the lesson!

[@australianperson2582]

Martingale is mean reverting.

[@JustCheckingMusic]

Hi, interesting video! It gives a great introduction to copulas. Is the copula module for python available somewhere?

[@jacquesjoubert2797]

Thanks! Yes the copula module is part of the ArbitrageLab python library. hudsonthames.org/arbitragelab/

[@JustCheckingMusic]

@@jacquesjoubert2797 Thank you a lot! It requires payment I guess? "pip install arbitragelab" function does show an availablr library.

[@Silver1980love]

Yes, there are many copula packages in python.