Arbitrage Trading Decision Model
Directly taken from my Kaggle notebook The formula can be adapted into an arbitrage-trading decision model like below, but by itself it is not an arbitrage formula. R ( t ) = R max m ( t ) = R max 7 ∑ i = 1 7 s i ( t ) R(t)=R_{\max}m(t) =\frac{R_{\max}}{7}\sum_{i=1}^{7}s_i(t) where the 7 signals s i ( t ) s_i(t) are normalized signals and R ( t ) R(t) is a dynamically calculated risk/reward/allocation value. For arbitrage, I would use the same concept like this: A ( t ) = 1 7 ∑ i = 1 7 s i ( t ) A(t)=\frac{1}{7}\sum_{i=1}^{7}s_i(t) where the signals could be: Price spread Bid/ask spread Trading fees Slippage Market liquidity Transfer/settlement latency Historical spread reliability Then calculate the actual arbitrage profit: P arb = Q ( P sell − P buy ) − F buy − F sell − S buy − S sell − C trans...