Title :
Statistical arbitrage trading with wavelets and artificial neural networks
Author :
Zapart, Christopher
Author_Institution :
Adv. Financial Trading Solutions Ltd., Enfield, UK
Abstract :
The paper outlines the use of an alternative option pricing scheme to perform statistical arbitrage in derivative markets. The method links a binomial tree to an innovative stochastic volatility model that is based on wavelets and artificial neural networks. Wavelets provide a convenient signal/noise decomposition of volatility in a non-linear feature space. Neural networks are used to infer future volatility levels from the wavelets feature space in an iterative manner. The bootstrap method provides 95% confidence intervals for the option prices. When used to set up delta-hedged arbitrage trades in the US equity options market, the proposed approach generates substantial profits.
Keywords :
costing; financial data processing; neural nets; stock markets; wavelet transforms; artificial neural networks; binomial tree; bootstrap method; delta-hedged arbitrage trades; derivative markets; equity options market; nonlinear feature space; option pricing; statistical arbitrage trading; stochastic volatility model; wavelets; Artificial neural networks; Costs; Elasticity; Log-normal distribution; Neural networks; Particle measurements; Pricing; Share prices; Stochastic processes; Wavelet domain;
Conference_Titel :
Computational Intelligence for Financial Engineering, 2003. Proceedings. 2003 IEEE International Conference on
Print_ISBN :
0-7803-7654-4
DOI :
10.1109/CIFER.2003.1196339