Getting the daily return from a Pairs Trading Strategy using Matlab
Guys, I am developing a pairs trading strategy in Matlab for my thesis. My problem is the following. I modelled the system in order to buy or sell just 1 quantity of a pair of stocks. Considering that I can short sell, possible negative initial investment are possible. How can I calculate the return in this case?
Prudent version: cash received from shorts is a liability and serves as collateral against the borrowed shares. The return calculation should divide any profit by these short proceeds. Necessarily the max return would be capped at 100%.
Less prudent version: divide the return by only the margin required to support the short sale.
I think you can do it in the same way as done for futures.
You short sell at 100, price rises to 102, you made a loss of 2%, similarly, if it falls to 98, you made a profit of 2%. In futures, since you don’t actually own anything, based on your prediction, you either pay the 2% loss to exchange, or you receive the 2% profit from them.
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