Discovering Correlation Anomalies Made Easier With Excalibur Pro

One approach traders use for discovering either a pair-trading or statistical arbitrage strategy is whether the relationship between two instruments, which is normally strong, has weakened or moved in the opposite direction.

For basic pair trading, this is usually a function of correlation and making a bet on price movement that takes you back to a more highly correlated state. With statistical arbitrage, it becomes more complex – you are determining the mean-reverting capabilities of the instruments as well as looking at the relationships between them.

At Excalibur Pro, we have tools that take the guesswork out of correlation tracking – from our Heat Maps that show the top relationships to our Matrix that shows all relationships in asset classes to our Watchlists, where you build what you want to follow.

One Watchlist that we have created that is fun to follow is one that shows relationships between currencies and commodities that are often in lockstep. We call it Commodity FX. All of our correlation tools let you select the kind of calculation you would like to use to determine correlation – we watch a longer-term trend calculation that each day computes a 5-day average and then rolls it back a month (22 days). We then take the median and that’s our daily correlation value.

What we are seeing today is that typically strong relationships between commodities and their often-connected FX have weakened.

One that caught our eye was gold and AUDUSD. When we look at that longer-term correlation trend and then look at just the five-day average correlation calculation, we see the values have been whipping around. Very possibly a pair-trading opportunity.

We took it one-step further and to see if there seemed to be any potential statistical arbitrage opportunities here. We think we may have found one using Cointegration. We are starting to monitor and will report back in a future blog post.