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Statistical arbitrage trading with implementation of machine learning : an empirical analysis of pairs trading on the Norwegian stock market

Andersen, Håkon; Tronvoll, Håkon
Master thesis
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URI
http://hdl.handle.net/11250/2561266
Date
2018
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  • Master Thesis [4657]
Abstract
The main objective of this thesis is to analyze whether there are arbitrage opportunities on

the Norwegian stock market. Moreover, this thesis examines statistical arbitrage through cointegration

pairs trading. We embed an analytic framework of an algorithmic trading model

which includes principal component analysis and density-based clustering in order to extract

and cluster common underlying risk factors of stock returns. From the results obtained we

statistically prove that pairs trading on the Oslo Stock Exchange Benchmark Index does not

provide excess return nor favorable Sharpe ratio. Predictions from our trading model are also

compared with an unrestricted model to determine appropriate stock filtering tools, where we

find that unsupervised machine learning techniques have properties which are beneficial for

pairs trading.

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