advanced-algorithmic-trading

495
Figure 32.1: Kalman Filter Pairs Trade - TLT/IEI
Such a substantial drop in risk-adjusted performance is a clear indication that the strategy
should be considered for retirement. Either any particular alpha/edge previously associated
with its predictions has now been arbitraged away, or the underlying structural relationship has
changed.
In this example it could be that the aluminum refining firm introduced its own aluminum
smelting hedging strategy by trading natural gas prices on its own account. This would have the
effect of diminishing the impact of natural gas prices on its own profitability, thus rendering this
strategy difficult, if not impossible, to implement profitably.