Pairs trading in forex market with respect to intrinsic time
The competition and voting have completed. Winners were determined by the citizens of Lykke City.
Days of the project
Nov 27, 2017 - Jan 14, 2018 (47 days)
Nov 27, 2017 - Jan 7, 2018
Nov 28, 2017 - Jan 7, 2018
Jan 7 - Jan 14, 2018
Pairs trading, a market-neutral strategy, is one of the most well-known and heavily used strategies among hedge funds and portfolio managers. This popular statistical arbitrage strategy was developed during the 1980s by a group of computer scientists, mathematicians, and physicists, working for Morgan Stanley. A strategy, making use of inefficiencies in financial markets, matching a long position with a short position in two stocks, exchange-traded funds (ETFs), currencies, commodities or options of the same sector.
At Lykke, we are interested to conduct research regarding pairs trading with respect to intrinsic time.
The goal is to match two trading vehicles that are highly correlated, trading one long and the other short when the pair's price ratio diverges. The entry points are found with the help of standard deviations and historical data. If the pair reverts to its mean trend, a profit is made on one or both of the positions.
At Lykke, we're in the process of redefining the way how time is looked upon in financial markets. Leading to a long-needed paradigm change, namely from observed physical time to an activity based timescale, called intrinsic time. In contrast to the continuity of physical time, now only interactions, or events, let a system’s clock tick. This event-driven paradigm defines focal points by blurring out irrelevant details of the price evolution with the help of defining fixed event thresholds of different sizes.
With these events, every price curve can be dissected into components that represent a change in the price trend (Directional Change) and a trend component (Overshoot). For a Directional Change to be detected, ﬁrst an initial direction mode needs to be chosen. As an example, in an up mode, an increasing price move will result in the extremal price being updated and continuously increased. If the price goes down, the diﬀerence between the extremal price and the current price is evaluated. If this distance (in percent) exceeds the predeﬁned Directional Change threshold, a Directional Change is registered. Now the mode is switched to down and the algorithm continues correspondingly.
Pairs trading in forex markets with regard to intrinsic time
Please conduct research on pairs trading in forex markets with the help of intrinsic time. Please do look at the spread between two currencies and backtest this data with respect to intrinsic time. In detail, action in this setup should only be taken in the event of intrinsic events.
Published papers about intrinsic time
One paper covers FX scaling laws “Patterns in high-frequency FX data: discovery of 12 empirical scaling laws”, James B. Glattfelder, A. Dupuis, R.B. Olsen and another paper covers an intrinsic time-based trading algorithm “The Alpha Engine: Designing an Automated Trading Algorithm” by Anton Golub, James B. Glattfelder, and Richard B. Olsen.
Patterns in high-frequency FX data: discovery of 12 empirical scaling laws: Scaling Laws
The Alpha Engine: Designing an Automated Trading Algorithm: Alpha Engine
Requirements for the work
The submission should include an analysis of pairs trading in forex markets using intrinsic time. Please include the programming code used for your research work.
Any formulas or plots should be also included in the document.
A few disclaimers:
There is no guarantee of winning a prize. The prizes are only awarded to entries that the Lykke judges find worthwhile. Prizes are awarded in Lykke coins, which may be redeemed for currency and sent to your bank. You must be at least 18 years of age. You must not submit twice — your first submission is the one that counts. You will be responsible for declaring your own income to your local tax authorities. All submissions will be disclosed to the public. The prizes are given at Lykke’s sole discretion. The decisions of the judges will be final — there is no appeals process if your project does not win a prize. No other compensation will be given at this stage.
|December 30, 2017 01:19|
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For this project, none of the submitted results matched our experts expectations, so we decided not to award the first prize.