Abstract
This paper studies the behavior of two Exchange Traded Funds, namely, EZU & FEZ and investigates the price dynamics to develop a trading strategy for them. Dollar spread between the two ETFs is examined to develop a stochastic model for the process and consequently to find the optimal threshold for technical trading indicators. Modelling the dollar spread by a trend-line approach, we use a special case of simple linear regression model in which the independent variable is a time index variable to find the upper/lower bands. We use moving average as an exit indicator, where we go long at our lower band and close it at the moving average, then we go short at our upper band and then buy at the moving average. We test our strategy for different moving averages and note down the trading statistics.
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