Market risk neutral strategies: modeling and algorithmization

Abstract

Traditional “buy & hold” strategies in the stock market are effective within the established trend direction. Under condition of the absence of directional dynamics of stock market indicators the efficiency of such strategies is low. Traditional strategies do not entirely exclude the market risk and the risk of an incorrect choice of the moment to open or close positions, and require a lot of experience with financial instruments. This causes the need of the development of investment alternatives that can provide an adequate rate of return on investment regardless of the stock market indicators movement. The development of automated trading systems (trading robots) in the 2010th is supposed to make market risk neutral strategies available to be used by the wide range of investors. The aim of this paper is to study and develop the market risk neutral strategies to manage the investment capital on the stock market. As a result of the research the algorithm of the pairs trading investment strategy was developed, which is effective regardless of the direction of market assets movement. Long-term pairs trading allow to take into account fundamental factors, as well as to hedge market risks. Such an algorithm is able to provide an adequate level of return on investment.