Statistical Arbitrage help

AI & Machine learning
1

Hallo guys, Apparently I found some strategies to hedge against some of my position in cryptocurrency but I'm unsure what kind of strategies this is, maybe statistical arbitrage? I'm wanting to short Binance Coin(BNB) and long pancakeswap(CAKE) coin because I believe this two 

coin are highly correlated with each other. 



here's what I need help upon on. 

  1. After finding the correlation of these coins, say I.E. that the correlation of the coin dropped from 0.9 to 0.8 within 5 days 

    and I want to take advantage of these belief and believing that the coin will return back of 0.9 again with a 0.1 correlation profit

    how can I transform this 0.1 (Correlation) percentage? 


  2. How much I need to buy to hedge against? 


  3. If the correlation do not return to 0.9, how can I perform stop-loss.


  4. Trades involved's fee's, how can I account the fee's into the trade and how much ratio must I use. 



    Appreciate if anybody could enlighten me :D 
2

Hi Charles,



It seems like you want to do pairs trading between Binance and Pancakeswap. 



One of the ways to do such strategies are:


  1. Run a linear regression between both coins and create a spread. The spread equation looks like this:

    spread = price of coin1 - hedge ratio * price of coin 2



    The hedge ratio tells you the number of coin2 to buy/sell for every unit of coin1.


  2. Next step is to check the stationarity of the spread. Or in other words, check whether the coin pair is cointegrated or not.


  3. If the coins are cointegrated with each other, you can create a trading strategy based on the Bollinger band or z-score. For example, you can sell the spread whenever it crosses the upper Bollinger band. Selling the spread means that you sell the 1 unit of coin1 and buy the hedge ratio times unit of coin2. Similarly, you can buy the spread when it crosses below the lower Bollinger Band. For the scenarios where spread doesn't revert to mean, you can set a stop loss above or below the Bollinger Band, according to your risk appetite.



    I recommend you to read this article to get a better picture of pairs trading.
3

Thank you so much vibhu really appreciate it! guess I have to try myself :D