Strategies · Library · Indexes
§6.2Pairs and relative value
Cash-and-carry arbitrage
Compare an index future with its fair price from the spot level, dividends and interest. If the future is rich, sell it and buy the basket; if cheap, do the reverse; close when they converge.
- Asset class
- Indexes
- Held for
- Days
- Data
- Needs data ARCANE lacks
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Futures basis relative to fair value
- Entry and exit
- Trade when basis exceeds costs; close at convergence.
- Sizing
- Equal dollar legs
How it fails
- Costs and slippage
- Short selling the basket
- Speed required
Data it needs
- inputs ARCANE does not hold
Needs futures term structure, dividends and fast execution.
How ARCANE uses it
None yet: ARCANE does not hold the data this trades on.
Needs futures, shorting and fast data.
Filed under the pairs and statistical arbitrage card
Find two securities whose prices moved together for a year. When the gap between them opens past two standard deviations, buy the laggard and sell the leader.
A paper plan from this card holds 5 to 126 days, stops at 1.5× the expected move and uses at most 50% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §6.2, p. 78 of the SSRN version. Described in our words. Pairs and relative value is ARCANE’s filing, not the book’s.