Relative value trading using macro data

Posted by on Oct 3, 2013 in ArbMaker News! | No Comments

Stimulating article a few days ago from Mr. Basenese at Wall Street Daily in which he links income inequality to a relative value pairs trade opportunity between Wal-Mart and LVMH Moet Hennessy Louis Vuitton SA. He presents this chart in making his case:


Now there is no statistical suggestion as to cointegration support for the pair over the period 2012 until now in Mr. Basenese’s analysis. Does any exist that would buttress the argument presented? We ran WMT against MC (the primary Paris listing of LVMH) to see.

There is indeed cointegration at the 90% confidence level since 2011  – but not when using 2012 as the starting point. That may suggest the relationship is weakening. However, whilst trading a pair like this runs legging risk – the primary exchanges are not open concurrently – the P&L record over both 2011 and 2012 is still good:

wmt mc1

Visually the trades panned out this way:

wmt mc2

Some details of the analysis:

  • End-of-day data
  • Basic Z-score based strategy under a fixed beta calculation method
  • 41 day average holding period per trade
  • Outlay per trade = ~$9000 unmargined, ~$3600 margined
  • Gross profit per trade $565, a return per trade of ~6% unmargined and ~15% margined
  • Margin assumed at 40%
  • Unmargined profit = 51% over the period
  • Margined profit = 128% over the period
  • Currency differences accounted for
  • Trading hour differences accounted for
  • Relative beta accounted for

The data suggests taking a long position today in Walmart and shorting LVMH. But, given the deteriorating cointegration profile 2011 vs 2012, how much longer will the theory and the stat continue to hold and support the trade…

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