it was only possible becausethe deal was a stock swap, which meant that TRV could enjoy the richcurrency provided by its own stock.18After the announcement, the spread remained very close to its parvalue, providing opportunities only around a few percents. Figure 9-8is a magni®cation of the period from April 6 to October 7, 1998. ThereMarket Spread CCI versus TRV(after announcement)
Figure 9-8 CCI/TRV(Source: Compiled by author from Datastream data.)18
For a variety of reasons, a stock swap is more interesting than a cash tender. Forexample, in the United States it is usually considered a nontaxable event whereas atender offer is generally assimilated to an extraordinary dividend and taxed at theincome rate.
452
COMMON ARBITRAGE SITUATIONS
is a clear narrowing around July because market participants weregetting extremely con®dent that the merger would proceed with theproposed terms. Again this is normally what happens in a fairly standard merger when the deal is proceeding smoothly. Interestingly, however, the later part of 1998 seems to be much more chaotic, and thisdivergence was the result of the Russian crisis.In September 1998 Russia virtually defaulted on its sovereign debtsand obligations, sending a wave of panic throughout the world. The®rst targets for massive selling were naturally multinational bankingand ®nancial institutions, among which were TRV and CCI. BecauseCCI was traditionally more involved in banking and lending, the market hammered its stock much more heavily than that of TRV, wideningthe spread considerably. Consider Figure 9-9, a chart of CCI, TRV, andthe S&P 500 during the largest part of the crisis. The market at largesuffered, and the S&P lost between 10 and 12 percent before recovering. Banks, however, aggregated much more concern because of thenature of their business, and as a result CCI, for example, lost up to 40percent in a few weeks. On September 10, when uncertainty about theexact state of Russia's treasury was the highest, CCI lost considerablycompared to its price in the merger, probably on worries that TRV
Figure 9-9 CCI/TRV(Source: Compiled by author from Datastream data).
CHAPTER 9 RISK ARBITRAGE
453
would revise its bid. This appeared to a large extent as a possiblereplay of BT/MCI one year before.In contrast to BT/MCI, however, none of the parties really entertained the option of revising the deal, probably because the Russiancrisis did not transform itself into a worldwide cataclysm and certainlyalso because the merger was too advanced. Therefore, arbitrageurs orinvestors who accepted the risk and entered the merger on September10 or close to that date ended up with an exceptional reward twomonths later when the deal effectively closed.
HSBC/CCF
The acquisition of CreÂdit Commercial de France (CCF) by Hong-Kongand Shanghai Bank (HSBC) in July 2000 was also an example of a fairlystraightforward transaction. It proceeded relatively smoothly from thedate on the announcement but presented, however, two interestingparticularities. First and foremost, the deal implied that one of thelast large independent French banks would be acquired by a foreigncompetitor. Considering the traditional role of the French central bankin monitoring the national banking industry, there was no assurancethat the original indication of interest from HSBC could at some pointevolve into a clear-cut tender offer. The second point is the fact thatCCF was quoted in Paris and HSBC in London, which created a foreignexchange exposure in addition to the particularities associated with theliquidation on the French stock exchange.The story starts on December 12, 1999, when ING, the biggest Dutch®nancial-services company, made public a bid it had extended to theCCF board, at 137.5 per share. ING at that time held already 19.2percent of the bank's capital, and considered the merger as an opportunity to expand its network and business in France. In front of the supposed lack of enthusiasm from CCF's board, ING withdrew its offer thenext day. CCF's stock closed at 126 on that day, a gain of 5.2 percent.The prevalent feeling at that time was that the offer was not really dead,but negotiations were being taken away from public scrutiny.Indeed, ING revived its bid on March 16, 2000, extending the offeruntil May 30. CCF's shares rose 11.2 percent to close at 124, still fairlylow compared to the offer of 137.5. One of the reasons that the gapremained so large is the French regulation that required ING to obtainof®cial approval before increasing its stake in CCF above the thresholdof 20 percent. The approval was dependent upon a number of factors,including the fact that the offer should be friendly and therefore agreeable to CCF shareholders.
454
COMMON ARBITRAGE SITUATIONS
On April 1, HSBC made a surprise offer for CCF, valued signi®cantly higher the terms proposed by ING. HSBC proposed 150 in cashor 13 shares of its stock, which amounted to 160 considering the priceof HSBC and the exchange rate between the British pound and the euro.CCF shares rose 16.2 percent to close at 151.7. ING announced veryhappily that it was accepting the offer and would tender its share toHSBC. HSBC indicated that it had support from 58 percent of CCFshareholders, and both parties presented the deal as a friendly opportunity to complement each other's line of business. The transaction wascleared by the Banque of France on May 31, and the tender offer wasof®cially extended on June 7 for 25 business days until July 12.Figure 9-10 illustrates the unfolding of the transaction through theprice of CCF shares from December 1999 to July 2000. The two offersfrom ING are clearly visible, and this is even more true of the HSBC bidon April 3, 2000. Note also the massive increase in trading volume onthat particular day and more generally the fact that the volume isde®nitely higher after the announcement.A second chart, Figure 9-11, will give us a more detailed view ofthe spread just after the announcement. The spread is remarkably closeto zero until June 23, even though the offer is open until July 12. June 23is in fact the last trading day of June for which delivery is assured. An
Figure 9-10 HSBC/CCF(Source: Compiled by author from Bloomberg data.)
CHAPTER 9 RISK ARBITRAGE
455
Market Spread HSBC versus CCF
HSBC versus CCF
Figure 9-11 HSBC/CCF(Source: Compiled by author from Bloomberg data.)
investor buying CCF on or before June 23 will physically receive theshares on June 30, which is the settlement day for the liquidation ofJune. Because shares must be physically in the possession of an investor to be tendered to HSBC, June 23 is the last day on which shares canbe acquired and delivered. After that day, if the offer is successful,HSBC has full discretion as to the terms of the remaining shares outstanding that it does not own. The results of the offer were made publicon July 24, and HSBC successfully tendered 74.6 percent of CCF outstanding shares. Combined with the shares it already owned, HSBCcontrolled 98.6 percent of CCF's capital.19In addition to the liquidation process, this merger offers an additional curiosity in the sense that it is a cross-border transaction. Toenter the arbitrage, traders had to sell HSBC in London and buyCCF in France. Technically speaking, execution presents no particular
19
Note that the 1.4 percent remaining constitutes an interesting opportunity. To complete its acquisition, HSBC will have to buy these shares. If it does extend terms equalto those of the original offer, then shares acquired after June 23 at a substantialdiscount could be tendered for a huge pro®t. There is a chance, however, thatHSBC will propose less favorable terms because holders will have no choice but toexchange their shares. The CCF discount after June 23 is the result of this uncertainty.
456
COMMON ARBITRAGE SITUATIONS
dif®culty, except that the two stocks are not settled in the same currency. To understand how this particular situation affects the arbitrage,let's reconsider the generic diagram in Figure 9-12.We introduce the second currency through a different interest rateand a foreign exchange rate. rE and r£E denote respectively the relevantinterest rate for the euro and British pound, and f =£ and f' =£ the spotexchange rate on t0 and t1 .On t0 :. Buy 1 share of T at PT .
. Secure a borrowing of r shares of A until the expiry at bA .. Sell r shares of A at PA .
. Exchange r  PA for r  PA  f
=£ .
These operations generate a set of cash ¯ows CF£0 and CF0 equal to:CF£0  r  PA
r  PA  0
CF0  r  PA  f =£
PT
CF£0 is equal to zero by construction, and CF0 will most probably bepositive, if PT is below its par value in the deal.20 We assume that welend this amount at rE until the expiry.On t1 :. Receive r shares of A from the exchange of T.. Deliver r shares of A to the original lender.. Pay borrowing fee r  bA  PA .
. Payaccumulated dividends onr  dA  r  1  r£A   dA .. Receive CF  1  r   r  PA  fE=£0t
, P
0
A
, P
, f
T
€
t
/£
A
original
lender:
PT   1  rE :
, P'
1
to
A
, P'
Toda y
, f'
T
€
/£
Expiry
d
T
r
€
T
d
r
€
E
r
£
A
A
£
, r
E
,
b
A
Figure 9-12 ADR20
Note that we took implicitly the perspective of a French investor who does not wantto carry a position in pounds. Alternatively, a British investor would probably notwant to carry a position in euros.
CHAPTER 9 RISK ARBITRAGE. Receive accumulated dividends on T : dT 
The cash ¯ows CF£1 and CF1CF£1 
457
1  rT   dT .
are:
r  bA  PA
CF1  r  PA  f =£
r  dAPT : 1  rE   dT
The ®nal P&L is therefore equal to:CF  r  PA  f =£
PT   1  rE   dT
r  bA  PA  r  dA   f 0 =£
This expression is less simple than the original one, and it has twoimplications:. The spread is now r  PA  f
PT to re¯ect the fact that PA is in=£British pounds.. The term (r  bA  PA  r  dA   f 0indicates that dividends and the=£borrowing fee on A are potentially subject to a foreign exchangerisk because f 0 =£ is unknown until the expiry. One way to hedgethis risk is to enter a foreign exchange forward transaction for theappropriate amount.In short, the position is exposed to the foreign exchange through dividends and borrowing fees, not because of the spread itself, whichmeans that the magnitude of the exposure is probably relatively low.To execute the arbitrage, in practice we simply need to exchange anamount equal to r  PA every time we trade A and T and hedge thefuture payments of dividends and borrowing fees. A cross-borderarbitrage requires a little bit more discipline than a regular situationbecause of one more variable, the exchange rate, but the general principles hold unchanged.
CONCLUSIONRisk arbitrage is a very active strategy nowadays, and the examinationwe just performed should give a sense of why this is so. First, returnsare higher than index arbitrage, or absolute convergence situations ingeneral, requiring much less capital to start with. Deals are plentiful,and although this may not last forever in the United States, Europe andAsia are only beginning their individual consolidation. Finally, risk isfairly simple to understand and monitor, notably because of the factthat generally only two securities are involved in a given position. It isno surprise, therefore, that more and more capital ®nds its way to riskarbitrage hedge funds, making the environment more and more competitive and, hopefully, the market more ef®cient.
This page intentionally left blank.
10P AIR T RADING A NDT ECHNICAL T RADING
INTRODUCTIONPair trading is a well-known and very simple strategy. It is based onthe assumption that a large part of the information affecting stockprices is more related to the industry sector than it is to a particularcorporation. In other words, stocks within the same industry grouptend to behave in a similar way, and any sudden divergence in theirprices is likely to disappear in the very short term. It is then possible totake a position by entering the spread when it is suf®ciently wide,expecting a correction. By extension, this strategy can be applied toany pair of companies that are believed to behave in a similar way,even if they are operating in distinct industries. In essence, it is exactlysimilar to a situation of risk arbitrage without the existence of a corporate event to force convergence.Therefore, it is no surprise that pair trading in general is consideredhighly speculative, except in very particular situations like Royal Dutch(RD) and Shell (SC), which we will examine shortly. This type of trading is hardly an arbitrage, although it is sometimes referred to as one.The reason behind the confusion is that pair traders in general have avery strong discipline in monitoring their risks as a consequence of thelack of certitude about the outcome of their day-to-day transactions.Therefore, strictly speaking, the risk of losing very large amounts episodically is relatively low because the traders exercise strict self-discipline, but the illusion is that the strategy is ``risk free.'' On the otherhand, the possibility of losing systematically a little bit on every459
Copyright 2001 The McGraw-Hill Companies, Inc. Click Here for Terms of Use.
460
COMMON ARBITRAGE SITUATIONS
tradeÐif only because of transaction costsÐis extremely real, andbeing successful at trading pairs is not necessarily easy.Not surprisingly, pair trading comes in many shapes and forms. Ifpairs are carefully chosen within identical industry groups and rigorously analyzed with respect to their business models and cost andrevenue structures, chances are that a hypothetical convergence willhave a lot of substance and as a result will present an attractive riskreward pro®le. In that type of situation, a trader will typically follow asmall number of pairs, making sure that he or she has backed his or herassumptions with adequate fundamental information about the companies. An alternative procedure is to be more systematicÐfor example, choosing pairs based on a strictly statistical criterion and trading asoften as possible with small positions in order to spread the risk over alarge number of convergence patterns. The extreme form of trading inthat area is statistical arbitrage, a strategy based on trying to take advantage of observed historical patterns, usually for small but numerouspositions.Technical trading is a continuation of the same set of ideas. Tradersare typically looking for price patterns in the market, but instead ofhedging them with another instrument, which would transform theirposition in a relative value portfolio, they often keep the position globally unhedged, although they may carry long and short at the sametime. In fact, this de®nition is vague enough to include virtually everystrategy based on some sort of pattern analysis, without the explicitknowledge of a convergence, provided the pattern is reasonably stableto give some support to the idea that the strategy is less risky than anoutright exposure to the market.Because trading strategies are so diverse when we move awayfrom traditional forms of convergence, it is naturally more dif®cult topropose general rules and insights. As a result, the discussion in thischapter will probably appear less focused and less conclusive thanbefore. This is also a re¯ection of what is happening in real life fornew or junior traders. Starting as an index or risk arbitrageur is relatively easy because the market provides some guidance and the techniques are well known. In contrast, traders who want to explore newgrounds have to rely above all on their judgment and experience to®nd new ideas and transform them into pro®table trades.We will give here several relevant examples of common tradingstrategies, trying to understand what is the general idea behind each ofthem and what this idea implies in terms of risk. We will start byconsidering simple and robust examples of pair trading and proceedto more speculative trading.
CHAPTER 10
PAIR TRADING AND TECHNICAL TRADING
461
SPECULATIVE ARBITRAGEIf we refer again to the convergence continuum introduced in the ®rstsection, we can infer several characteristics about what a situation ofspeculative arbitrage would induce in terms of risk and pro®tability.Table 10-1 presents an overview of a convergence framework appliedto both pair trading and technical trading distinctly. It is quite naturalthat the absence of a convergence behind a particular position virtuallyvoids the meaning of a theoretical valuation. In other words, there is nobasis in postulating that the market is actually mispricing a particularset of instruments until the mispricing has been con®rmedÐthat is, itceases to exist.For the same exact reason, we cannot consider any hypotheses thata particular trader uses as having any sort of applicability to anothermarket participant. Naturally in a period of rising interest rates, forexample, banks will tend to suffer, and obviously all traders quiteTABLE 10-1Convergence
Absolute
Hypothetical
Pair Trading
SpeculativeArbitrage
Valuation
Theoretical
Mark to market
ConvergencetypeConvergenceriskExecution riskHedge
Public
HighlyproprietaryCritical
TheoreticalmeaninglessProprietarymodelsCritical
TheoreticalmeaninglessProprietarymodelsCritical
Low to nonexistentCriticalFixed quantity
Risk of carryTime horizon
ImportantKnown orbounded
Window ofopportunityPro®tability
Very short
RobustnessImplications
StrongPricing
10  1
LowMediumFixed quantity or Usually ®xeddeltaquantity
Medium to lowUsually nominalbut sometimes nohedge at allLowLowLowUncertain,UnknownUncertain,situationusually shortspeci®c(few weeks)LongerReasonably long Situationspeci®cSituation1  10Situationspeci®c, oftenspeci®c, oftencloser to 10 closer to 1101 for betterrisk controlWeakMedium to weak WeakNone (Inef®cient NoneNonemarket?)
462
COMMON ARBITRAGE SITUATIONS
probably share the same view because it is a result of the economicstructure of a bank. Therefore, the assumption that rising interest rateswill probably cause a decline in banks' share prices is widely sharedand certainly not proprietary in any way. Yet the implementation of anidea based on this observation is likely to differ from one participant tothe next. One trader will probably take an outright short on the sector,another will take a short but hedge it with a broad-based index, and athird one might want to trade pairs where the long side is expected tobe somewhat more resistant to higher interest rates than the short side.Regardless of the speci®cs, most trading strategies in the area of speculative arbitrage are highly proprietary, and usually the brainchild ofone particular trader or group of traders. With pair trading, the proprietary nature is probably less pronounced because common sensesupports the idea that similar businesses tend to evolve in a similarway. In fact, many studies of competitiveness have shown that overlong periods of time, competitive convergence is a very strong andactive force, eventually bringing all competitors within a similar framework characteristic of the economic fundamentals of the particularsector in which they operate. Therefore, a pair trading strategy basedon such a fundamental view is likely to produce somewhat similartrades on distinct trading desks.The most important consequence of a lack of certainty about theoutcome of a particular trade is that convergence is really the onlyrisk that matters. Convergence here is to be taken in a broad sense. Inthe case of pair trading, it obviously means that the spread willnarrow compared to its value when we originally entered the position.1 For technical trading, convergence means only that the patternunderlying each trade is robust enough to be recurrent. In some casesin which the position is held for a long period of timeÐthat is,several monthsÐborrowing might be an issue and a short squeezea concern. Along the same lines, the ®nancing of the position maycreate an additional P&L in some casesÐfor example, if one leg is acash instrument and the other a leveraged derivative. Overall, however, convergence is really the most uncertain parameter, and the onethat will essentially trigger all decisions, in and out. All other risks,which we termed risk of carry, are really secondary.
1
Note that we could also take a reverse position in which we are betting on the spreadwidening between two different stocks. We will consider this situation in ourexamples.
CHAPTER 10
PAIR TRADING AND TECHNICAL TRADING
463
As for hedging, the right choice for a speculative arbitrage isdependent on the speci®c details of that strategy. By and large, pairsare frequently hedged with a ®xed quantity method and usually technical positions with a nominal hedge.2 These are, however, not absolute rules because the underlying pattern dictates the appropriatehedge.Let's now examine in more detail opportunities and pro®tability.
OPPORTUNITIES AND PROFITABILITYOpportunity
For pair or technical trading, it is an understatement to say thatopportunities are plentiful. Only in the United States are there morethan 5,000 listed companies, and including the ®ve largest marketswe concentrate on, the total number is probably close to 10,000. Anycombination of these is a candidate for a pair analysis, even if thelarge majority will probably never lead anywhere. In terms of technical trading, the choice is vast as well. Over the last 20 years, numerous new technical indicators have been proposed, and arguably theones that have survived and become part of the standard analysistoolkit probably have some value and some interesting informationalcontent. In short, when the assumption of convergence is left behind,imagination is the only limit as to what is possible to try. Nowadaysimpressive resources, human as well as computational, are dedicatedto the speci®c goal of designing a pro®table strategy with an acceptable risk pro®le.3 It is no surprise then that the universe to choosefrom is quite important already and growing every day as new traders experiment with more and more computational power.To get a sense of what the most classical technical trading strategiesare, here is a short list extracted from an academic paper published in
2
The expression nominal hedge in that context means that at a given time, the totalnominal long is chosen equal to or close to the total nominal short. The quantitiesof each individual security may or may not change from one day to the next, or evenwithin the same trading session, but in general, the portfolio is kept relativelybalanced to avoid an outright exposure.3For an illustration of this point, consult, for example, the list of the 500 most powerfulsupercomputers installed in the world, available from www.top500.org. Finance is notthe ®rst industrial application, but it appears regularly side by side with telecommunications, automotive, aerospace, chemistry, and the like.
464
COMMON ARBITRAGE SITUATIONS
the Journal of Finance.4 The purpose of the paper was to determine iftechnical trading can beat the market, and we will certainly come backto the results. Meanwhile, the authors studied 7,486 trading rulesÐanimpressive number although a lot of these were obtained by varyingparameters without changing the underlying principle of the rule. Therules can be partitioned into the following categories:. Filter: A position is taken if a stock moves up by more than x
percent, until a reverse move occurs on the downside with anamplitude above x percent. At that time the position is unwoundand an additional short is taken. In essence, the signals are alternatively long or short following the occurrence of a move of amplitude x percent.5. Moving average: A position is taken following the crossover of theclosing price of a stock with a moving average, or the crossover oftwo moving averages of different periodicity.6. Support and resistance: Buy when the closing price exceeds the maximum price over the past n days, and sell when the closing price islower than the minimum over the past n days.7. Channel breakout: A channel is formed when the high over the previous n days is within x percent of the low over the previous ndays. A breakout on the upside is a buy signal, and vice versa forthe shorts.8. On-balance volume averages: The on-balance indicator is based onthe volume traded. Volume is added to the prior value of the4
R. Sullivan, A. Timmermann, and H. White, ``Data Snooping, Technical Trading RulePerformance, and the Bootstrap,'' Journal of Finance, 54, p. 5. References in footnotes 5,6, 7, and 8 are extracted from the article. Incidentally, note the years the rules wereoriginally proposedÐ1966, 1935, 1910, and 1922Ðwhich tells a lot about the neverending effort to outsmart the market. See also W. Brock, J. Lakonishok, and B.LeBaron, ``Simple Technical Trading Rules and the Stochastic Properties of StockReturns,'' Journal of Finance, 47. See also Andrew Lo, Harry Namaysky, and JiangWang, ``Foundations of Technical Analysis: Computational Algorithms, StatisticalInference and Empirical Implementation,'' National Bureau of Economic Research,Working Paper N. 7613, March 2000, for other articles on the same subject.5See, for example, E. Fama and M. Blume, ``Filter Rules and Stock Market Trading,''Journal of Business, 39, 1966, for a de®nition and examination of these rules.6See, for example, H. M. Gartley, Pro®ts in the Stock Market (Pomeroy, Wash.: LambertGann Publishing, 1935).7See, for example, R. Wyckoff, Studies in Tape Reading (Burlington, Vt.: FraserPublishing Company, 1910).8See, for example, W. Hamilton, The Stock Market Barometer (New York: Harper andBrothers Publishers, 1922).
CHAPTER 10
PAIR TRADING AND TECHNICAL TRADING
465
indicator if the stock closed up, but it is subtracted otherwise. Amoving average crossover is then applied to the indicator.Clearly, these are very classical rules in the sense that even an inexperienced investor is aware of them. To this list should be added the manymore that nobody will ever hear about because a trader is actuallymaking a living trading them.Another illustration of the same idea on the diverse nature of speculative arbitrage can be found in the statistics on hedge funds. Table10-2 gives a summary of the capital allocated to different relative valuestrategies. Relative value arbitrage on equity distinct from risk arbitrage accounts for more than half the total capital allocated. Naturally itis dif®cult to know what is exactly behind the different denominations,but in all likelihood it is either pair trading or some sort of technicaltrading in its largest sense.In conclusion, it is fair to say that it is dif®cult to qualify exactly theopportunities associated with strategies based on some sort of assumedconvergence pattern. Overall, however, they probably account for thebiggest part of the total capital allocated throughout the world toequity ``arbitrage'' other than index and risk arbitrage.
Pro®tability
The academic study we mentioned above was speci®cally designed todetermine if technical trading could beat the market and if so, by whatorder of magnitude. The study aimed at a rigorous analysis by correcting its results for a common bias in designing and back testing tradingTABLE 10-2Strategy
Assets ($ millions)
Partition
Convertible arbitrageFixed-income arbitrageOptions arbitrage
$1,865$1,584$778$4,227
27.3%
Market neutralStatistical arbitrageOther relative value
$4,165$1,440$2,627$8,232
53.3%
Risk arbitrage
$3,001
19.4%
Total
$15,460
100%
(Source: HedgeFund.net, November 1999, reprinted with permission.)
466
COMMON ARBITRAGE SITUATIONS
models: ``data-snooping.'' Data snooping refers to the danger of ®ttingthe data to a particular model and then claiming that the model isindeed very pro®table. For example, assume you are testing a modelover the period 1998 to 2000, and you ®nd out the best value for agiven parameter, such that the strategy yields 15 percent over the twoyear period. Associating this particular strategy to a yield of 15 percentgoing forward would be a logical error because 15 percent wasobtained by optimizing a parameter today when all historical dataare known, something that would have naturally been impossible ifthe strategy had been traded every day.Accounting for this bias, the authors make the following two conclusions:. Applied to the Dow Jones index for the period 1897 to 1996, the
best rule given by their selection process yields 17.2 percent inannualized average return, while a buy-and-hold strategy yields4.3 percent over the same period. This rule is a very simple ®veday moving average with a 0.001 band.9. When the best trading rule is determined from the period 1897 to1986 and applied to the following 10 years 1987 to 1996, theresults change entirely and the rule is absolutely not signi®cantanymore.The ®rst point is interesting because it gives statistical support to theproponents of technical trading, showing that over a large period oftime speci®c trading rules could have been pro®table in excess of themarket. The second point is also particularly interesting because apossible explanation proposed by the authors is simply that the markethas become more ef®cient and a rule that was pro®table in the studysample is simply not signi®cant anymore over the past 10 years. Forexample, it is very possible that October 1987 might have forced participants to reevaluate their understanding of the market.For us, the implications of this article are twofold. On one end, wehave at least an academic indication of how pro®table technical tradingmay be. Naturally, the particular result of the article should be takenwith a grain of salt, if only because in reality the operating mode for atrader would be much more ``hands on.'' For example, it is unlikelythat traders would use only one particular rule, even more so consider9
A buy signal is therefore generated if the price of the stock crosses upward a ®ve-daymoving average plus 0.1 percent, and a sell signal is generated when the price crossesdownward a ®ve-day moving average minus 0.1 percent.
CHAPTER 10
PAIR TRADING AND TECHNICAL TRADING
467
ing that the classical rules included in the sample are relatively ``prim