Return: Calculate return of back-test
In PairTrading: classical pair trading based on cointegration in finance

Description Usage Arguments Details Value Author(s) Examples

View source: R/PairTrading.R

Calculate the performance of pair trading by specified trading signal and hedge ratio

1	Return(price.pair, signal.lagged, hedge.ratio.lagged)

`price.pair`	pair stock price (xts object)
`signal.lagged`	lagged signal(see details)
`hedge.ratio.lagged`	hedge ratio created by EstimateParametersHistorically function(see details)

You have to consider "lag" to signal, because you can not trade when you calculate your trade position at that time. hedge.ratio.lagged is too. We defined "return" as following that [Return of (Buy-Sell)portfolio = (Return of Price1) * (Investmentratio of Price1) + (Return of Price2) * (Investment ratio of Price2) In this equation, as you know, "Return" is calculated as "Change ratio of price between two period". We defined "Investment ratio" as following that. [(Investment ratio of Price1) = 1 / (1 + abs(hedge ratio))], [(Investment ratio of Price2) = hedge ratio / (1 + abs(hedge ratio))]

performance data(not price but return) as xts object

Shinichi Takayanagi, Kohta Ishikawa

#load library
library(PairTrading)

#load sample stock price data
data(stock.price)

#select 2 stocks & estimate parameters
price.pair <- stock.price[,1:2]["2008-12-31::"]
params <- EstimateParametersHistorically(price.pair, period = 180)

#create trading signals
signal <- Simple(params$spread, 0.05)

#Performance of pair trading
return.pairtrading <- Return(price.pair, lag(signal), lag(params$hedge.ratio))
if(!all(is.na(return.pairtrading))){
  plot(100 * cumprod(1 + return.pairtrading))
}