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Application of a TGARCH-wavelet neural network to arbitrage trading in the metal futures market in China

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  • Lei Cui
  • Ke Huang
  • H.J. Cai

Abstract

For high-frequency statistical arbitrage, setting the proper trading threshold for each trading period is extremely important. We find that the optimal short-run trading threshold series in the Chinese metal futures market demonstrates chaotic characteristics. Therefore, we propose a new statistical arbitrage model in which a TGARCH model is applied to capture short-term price cointegration and asymmetric price spread standard deviations between futures contracts and a wavelet neural network is utilized to predict trading thresholds. Backtesting results demonstrate that the new model provides more stable and accurate trading thresholds and therefore generates more profits compared with the backpropagation neural network and historically optimal models. Potential topics for further study, including adjustments of the model to fit different market situations and the impact of transaction costs, are discussed.

Suggested Citation

  • Lei Cui & Ke Huang & H.J. Cai, 2015. "Application of a TGARCH-wavelet neural network to arbitrage trading in the metal futures market in China," Quantitative Finance, Taylor & Francis Journals, vol. 15(2), pages 371-384, February.
    • Handle: RePEc:taf:quantf:v:15:y:2015:i:2:p:371-384
    DOI: 10.1080/14697688.2013.819987
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    Cited by:

    1. Zhang, Huiming & Qian, Siji & Ma, Zhen, 2024. "An analysis of the market efficiency of the Chinese copper futures based on intertemporal and intermarket arbitrages," International Review of Financial Analysis, Elsevier, vol. 94(C).
    2. Hu, Yan & Ni, Jian & Wen, Liu, 2020. "A hybrid deep learning approach by integrating LSTM-ANN networks with GARCH model for copper price volatility prediction," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 557(C).

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