Chance discovery in stock index option and future arbitrage
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- @Article{tsang05:_chanc,
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author = "Edward P. K. Tsang and Sheri Markose and Hakan Er",
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title = "Chance discovery in stock index option and future
arbitrage",
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journal = "New Mathematics and Natural Computation",
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year = "2005",
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volume = "1",
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number = "3",
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pages = "435--447",
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month = nov,
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keywords = "genetic algorithms, genetic programming",
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DOI = "doi:10.1142/S1793005705000251",
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abstract = "The prices of the option and futures of a stock both
reflect the market's expectation of futures changes of
the stock's price. Their prices normally align with
each other within a limited window. When they do not,
arbitrage opportunities arise: an investor who spots
the misalignment will be able to buy (sell) options on
the one hand, and sell (buy) futures on the other and
make risk-free profits. Historical data suggest that
option and futures prices on the LIFFE Market do not
align occasionally. Arbitrage chances are rare.
Besides, they last for seconds only before the market
adjusts itself. The challenge is not only to discover
such chances, but to discover them ahead of other
arbitragers. In the past, we have introduced EDDIE as a
genetic programming tool for forecasting. This paper
describes EDDIE-ARB, a specialisation of EDDIE, for
forecasting arbitrage opportunities. As a tool,
EDDIE-ARB was designed to enable economists and
computer scientists to work together to identify
relevant independent variables. Trained on historical
data, EDDIE-ARB was capable of discovering rules with
high precision. Tested on out-of-sample data, EDDIE-ARB
out-performed a naive ex ante rule, which reacted only
when misalignments were detected. This establishes
EDDIE-ARB as a promising tool for arbitrage chances
discovery. It also demonstrates how EDDIE brings domain
experts and computer scientists together.",
- }
Genetic Programming entries for
Edward P K Tsang
Sheri M Markose
Hakan Er
Citations