The Bollinger Band Strategy is applied to the ETFs GLD (representing gold) and USO (representing crude oil). The fundamental reason for the cointegration of the 2 is that inflation drives up both assets and hence they are cointegrated. The pair is tested for cointegration first, then half-life and hedge ratio of pairs is calculated. A bollinger band mean reversion strategy is formed for this portfolio generating consistent stable returns.
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Investment Performance
Investment Return (?):
18.2%
Volatility (?):
15.2%
Sharpe Ratio:
1.2
Maximum Drawdown:
-12.5%
Investment’s Fundamental Concept:
A stationary portfolio is structured by combining 2 or more financial securities (non-stationary) whose price (net market value) is mean reverting. The strategy is profitable when investor buys the portfolio when it’s value is significantly below its long term mean and sells the portfolio when it’s value is significantly above its long term mean. The strategy’s aim is to capture gains from betting on reversion to the mean.
Investment’s Logic:
A mean reverting strategy is applied to the ETFs GLD (representing gold) and USO (representing crude oil). The fundamental reason for the cointegration of the 2 is that inflation drives up both assets and hence they are cointegrated.
The pair is tested for cointegration first, then half-life and hedge ratio of pairs is calculated. A bollinger band mean reversion strategy is formed buying when portfolio’s value below 1 standard deviation and selling when portfolio’s value above 1 standard deviation.
Other Investment Strategy Characteristics:
Investment Type:
Statistical Arbitrage
Investment Risk:
2/5 Low
Backtest Range:
30-40 years
Rebalancing period:
Daily
Investment Strategy Markets:
GLD ETF
USO ETF
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