A Markowitz Approach to Managing a Dynamic Basket of Moving-Band Statistical Arbitrages

TL;DR

This paper introduces a Markowitz-inspired method for managing a dynamic portfolio of moving-band statistical arbitrages, demonstrating strong risk-adjusted returns uncorrelated with market movements.

Contribution

It develops a novel approach to optimize a dynamic basket of MBSAs using Markowitz principles, with practical illustration on historical data.

Findings

Achieves high risk-adjusted returns

Portfolio remains uncorrelated with market

Effective management of dynamic arbitrage baskets

Abstract

We consider the problem of managing a portfolio of moving-band statistical arbitrages (MBSAs), inspired by the Markowitz optimization framework. We show how to manage a dynamic basket of MBSAs, and illustrate the method on recent historical data, showing that it can perform very well in terms of risk-adjusted return, essentially uncorrelated with the market.