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Ideas & tips to optimize ArbMaker
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Cross-sector analyses

Last week the Financial Times website published a piece on the effects of oil prices on aircraft financing (link, you may need to register). There’s much here to consider for relative value traders but, above all, it is an example of the potential opportunities across sector classifications.

We took a deeper look by selecting 18 names from across the oil, transportation leasing and aircraft manufacturing industries - including notable aircraft leasing specialists AerCap (AER) and Air Lease (AL). There are indeed interesting combinations that pop-out.
 
Try it - there is food there for thought!

Defining the trading universe


How can this be done with least pain if you do not have a Bloomberg? We recommend two sites:
  1. Nasdaq.com company lists
  2. Zacks.com screener tool
Both permit exports to excel where the data can be arranged in a format ArbMaker understands. Zacks has the advantage of containing volume data but disadvantage of requiring some setting-up of the filters.
 

Best recent client question


Question:
“I'm attempting to run some pairs that I have traded in the past, there are no matching results in the Coint Scan. I'm using IQFeed and there are no errors after running the pairs.

For example, RDS.A and RDS.B usually trade within a tight range and I've done well with these in the past.”

Answer:
This can seem a ridiculous situation since different classes of shares of the same company clearly will track each other closely. But the pairs are likely failing in one of three ways:
  1. On autocorrelation: If it is present the pair is marked as a fail since autocorrelation indicates that the distribution of the spread data is non-random and thus cannot be considered normally or near normally distributed. The validity of the Z-scores depends on that normality assumption being in place.
  2. On MRC (mean reversion coefficient): the calculated number might be even lower than the -1.75 you have in place. Results less than -1 suggest pairs that tend to over-revert but also mean they do not meet cointegration criteria. You can see this number under the Details button.
  3. On the residuals test: there's a residuals number visible in the Details tabs of all pairs. It needs to be less than -3.9 to qualify at the 99% threshold you have in the Options parameters. A level of -3.3 corresponds to ~95% and a level of -3.0 is ~90%. The software only marks cointegrated if the 95% threshold is met.
If you tick the 'Bypass filters' for the test you ran you should see the data appear in the Results tab. From there it is possible to see what is going on in terms of cointegration with the Detail button.

Are you a forex specialist?


ArbMaker also exists in an FX-only version at $199 for a lifetime license.
Get ArbMakerFX here
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