Welcome to our Knowledge Base

Elliott Pairs Trading Model, 2005

You are here:
< last topic

Elliott Pairs Trading Model, 2005

This paper models the spread of a pair (or any mean reverting synthetic asset) as a discrete Ornstein-Uhlenbeck (O-U) process. It then uses the Kalman filter to estimated the “true” (or hidden) price for the spread. When the observed price is bigger than the estimated true price by a threshold, we sell; otherwise we buy. The threshold and average holding time of a trade can be computed from the properties of the O-U process.

The paper describes two ways to estimate the parameters in the state process (for the spread):

  1. Shumway and Stoffer (1982) smoother approach (offline)
  2. Elliott and Krishnamurthy (1999) filter approach (online)


There seems to be some typos in the equations in the 2nd approach (the online algorithm) in the original publication.







Was this article helpful?
0 out of 5 stars
5 Stars 0%
4 Stars 0%
3 Stars 0%
2 Stars 0%
1 Stars 0%
How can we improve this article?
Table of Contents

Leave a Reply

Your email address will not be published. Required fields are marked *