- [Instructor] Now that we have a basic understanding…of what we call pairs trading, that is trying to trade…different securities based on the relationship between them,…let's turn to another type of pairs trade.…In this case, in columns B and C, we have the stock prices…for Viacom Class A shares and Class B shares.…Now, as the names imply, Viacom Class A and Class B…both refer to exactly the same company,…and in fact they both give you ownership…in the same underlying firm and…the same share of the profits.…
As a result, in theory, these two stocks…ought to have exactly the same value.…In practice, though, because Viacom B shares have…a larger float, that is there's more shares outstanding,…they tend to trade more frequently…then Viacom Class A shares do.…So there's a relationship between these…two classes of shares, we might want to…try and capitalize on that relationship.…Now, just as before, I've put together a ratio…and it looks like, on average, the relationship…between Viacom Class A and Class B,…averages about 0.99, so on average,…
Professor Michael McDonald provides a brief primer on securities markets. He explains how data helps investors forecast performance and automate trading. Then he moves into the practical steps: coming up with algorithmic trading rules and developing and testing an algorithm. Finally, he shows how the algorithm can be applied and eventually expanded to other securities. Anyone working in financial services, or interested in investing in the stock market, will be able to use these tutorials to understand and develop simple trading algorithms of their own.
- Define what a share of stock is.
- Classify the type of trading that attempts to capitalize on the bid-ask spread.
- Name the rule that can be used as a metric for Fed interference in the market.
- State the first step in a data analysis project.
- Identify the type of characteristic algorithmic trading relies on.
- Break down how VAR is used to manage risk.