Optimal pairs trading with dynamic mean-variance objective

Change log
Zhu, Dong-Mei 
Gu, Jia-Wen 
Siu, Tak-Kuen 
Ching, Wai-Ki 

jats:titleAbstract</jats:title>jats:pPairs trading is a typical example of a convergence trading strategy. Investors buy relatively under-priced assets simultaneously, and sell relatively over-priced assets to exploit temporary mispricing. This study examines optimal pairs trading strategies under symmetric and non-symmetric trading constraints. Under the assumption that the price spread of a pair of correlated securities follows a mean-reverting Ornstein-Uhlenbeck(OU) process, analytical trading strategies are obtained under a mean-variance(MV) framework. Model estimation and empirical studies on trading strategies have been conducted using data on pairs of stocks and futures traded on China’s securities market. These results indicate that pairs trading strategies have fairly good performance.</jats:p>

4901 Applied Mathematics, 49 Mathematical Sciences
Journal Title
Mathematical Methods of Operations Research
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Springer Science and Business Media LLC
Research Grants Council of Hong Kong (17301519)
National Natural Science Foundation of China (71601044, 11671158)
IMR and RAE Research Fund, Faculty of Science, University of Hong Kong (Not Applicable)
National Natural Science Foundation of China (11801262)
Fundamental Research Funds for the Central Universities (2242020S30030)
Seed Funding for Basic Research, Seed Funding of HKU-TCL Joint Research Centre for Artificial Intelligence (Not Applicable)