Lecture 11 Trading Strategies and Algorithmic Trading
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Lecture 11 -Trading Strategies and Algorithmic Trading
- EQUITIES ARBITRAGE / TRADING STRATEGIES:
Arbitrage:
Theoretically, when prices do not reflect fundamentals, arbitrage provides the mechanism by which any pricing discrepancies are quickly eliminated
In practice, arbitrage refers to the profit generating mechanism on prices that temporarily deviate from the theoretical or perceived equilibrium relationship
Categories of Arbitrage:
Pure arbitrage
Near arbitrage
Speculative arbitrage
Conditions for Arbitrage:
The possibility of arbitrage can only occur when one of three conditions are met:
The law of one price does not hold (i.e., the same asset does not trade at the same price on all markets)
Two assets with identical cash flows do not trade at the same price
An asset with a known...
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