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Contents Listing

Preface.
Acknowledgments.
PART ONE: Background Material.
CHAPTER 1: Introduction.
The CAPM Model.
Market Neutral Strategy.
Pairs Trading.
Outline.
Audience.
CHAPTER 2: Time Series.
Overview.
Autocorrelation.
Time Series Models.
Forecasting.
Goodness of Fit versus Bias.
Model Choice.
Modeling Stock Prices.
CHAPTER 3: Factor Models.
Introduction.
Arbitrage Pricing Theory.
The Covariance Matrix.
Application: Calculating the Risk on a Portfolio.
Application: Calculation of Portfolio Beta.
Application: Tracking Basket Design.
Sensitivity Analysis.
CHAPTER 4: Kalman Filtering.
Introduction.
The Kalman Filter.
The Scalar Kalman Filter.
Filtering the Random Walk.
Application: Example with the Standard & Poor Index.
PART TWO: Statistical Arbitrage Pairs.
CHAPTER 5: Overview.
History.
Motivation.
Cointegration.
Applying the Model.
A Trading Strategy.
Road Map for Strategy Design.
CHAPTER 6: Pairs Selection in Equity Markets.
Introduction.
Common Trends Cointegration Model.
Common Trends Model and APT.
The Distance Measure.
Interpreting the Distance Measure.
Reconciling Theory and Practice.
CHAPTER 7: Testing for Tradability.
Introduction.
The Linear Relationship.
Estimating the Linear Relationship: The Multifactor Approach.
Estimating the Linear Relationship: The Regression Approach.
Testing Residual for Tradability.
CHAPTER 8: Trading Design.
Introduction.
Band Design for White Noise.
Spread Dynamics.
Nonparametric Approach.
Regularization.
Tying Up Loose Ends.
PART THREE: Risk Arbitrage Pairs.
CHAPTER 9: Risk Arbitrage Mechanics.
Introduction.
History.
The Deal Process.
Transaction Terms.
The Deal Spread.
Trading Strategy.
Quantitative Aspects.
CHAPTER 10: Trade Execution.
Introduction.
Specifying the Order.
Verifying the Execution.
Execution During the Pricing Period.
Short Selling.
CHAPTER 11: The Market Implied Merger Probability.
Introduction.
Implied Probabilities and Arrow-Debreu Theory.
The Single-Step Model.
The Multistep Model.
Reconciling Theory and Practice.
Risk Management.
CHAPTER 12: Spread Inversion.
Introduction.
The Prediction Equation.
The Observation Equation.
Applying the Kalman Filter.
Model Selection.
Applications to Trading.
Index.