Wednesday, December 23, 2009
EEM / VXX Pair Trade
Today is my birthday and here's my present to regular readers...................
A robust little pair trade that's got a lot going for it.
#1... the N day cycle is 7 days, which produces a typical weekly cycle from entry to exit.. a time frame I like as it contains risk exposure and avoids extended drawdowns.
#2... checking the trade report for the past 6 months reveals no losers and some substantial winners. This is not a one sided PDQ trading approach, but a true pair trade generating gains from both legs.
#3... the equity curve has remained upslope for the backtest period duration and the bounces off the z-score bands have remained consistent without the extended lag we've seen in other profiled pairs.
#4... the EEM/VXX presents an attractive beta spread. 20 day beta on the EEM is 1.93, while the VXX is -2.83. I've found divergent pairs to be much more productive than convergent pairs and although that's a personal preference, I've found the risk/reward ratio easier to control.
#5... for Schwab clients a special bonus...you can just trade the SCHF commission free as a proxy for the EEM side of the trade.
Check in the archives for my previous correlation alignment study of the EEM and SCHF.