Monte Carlo or Bust
Automated Trader Magazine
Statistical Arbitrage: Algorithmic Trading Insights and Techniques Chapter 1 Monte Carlo or Bust
We must always be ready to learn from repeatable
occurrences however odd they may look at first sight.
—Box on Quality and Design, G.E.P. Box
1.1 BEGINNING
In 1985 a small group of quantitatively trained researchers under the tutelage of Nunzio Tartaglia1 created a program to buy and sell stocks in pair combinations. Morgan Stanley’s Black Box was born and quickly earned a reputation and a lot of money. A fifteen-year rise to heroic status for statistical arbitrage (a term uncoined at that time) was begun.
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Details of the Black Box were guarded but soon rumor revealed the basic tenets and the name ‘‘pairs trading’’ appeared in the financial lexicon. The premise of pairs trading was blindingly simple: Find a pair of stocks that exhibit similar historical price behavior. When the prices of the stocks diverge, bet on subsequent convergence. Blindingly, beautifully simple. And hugely profitable. ...