Pairs Trading with Wavelet Transform
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Pairs Trading with Wavelet Transform
Burak Alparslan Eroğlu; Haluk Yener; Taner M. Yigit
- TRIstanbul Bilgi University
- TRKoç University
- ?Koc University - College of Administrative Sciences and Economics
- TRBilkent University
- ?Bilkent University - Department of Economics
Strategy in a nutshell
The strategy combines minimum distance and cointegration methods with wavelet transforms to improve pairs trading on S&P 500 stocks. By filtering noise and focusing on meaningful price spreads, it generates stronger and more reliable trading signals.
Economic rationale
The rationale is that noisy financial data weakens traditional pairs trading methods. Wavelet filtering reduces this noise, allowing better identification of genuine co-movements between stocks, improving profitability and robustness of trading strategies.
Backtest performance
Annualised return36.9%
Volatility10%
Sharpe ratio3.69