Analytic solutions for optimal statistical arbitrage trading

William K. Bertram

Physica A: Statistical Mechanics and its Applications, 2010, vol. 389, issue 11, 2234-2243

Abstract: In this paper we derive analytic formulae for statistical arbitrage trading where the security price follows an Ornstein–Uhlenbeck process. By framing the problem in terms of the first-passage time of the process, we derive expressions for the mean and variance of the trade length and the return. We examine the problem of choosing an optimal strategy under two different objective functions: the expected return, and the Sharpe ratio. An exact analytic solution is obtained for the case of maximising the expected return.

Keywords: Econophysics; Stochastic processes; First-passage time (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (27)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:389:y:2010:i:11:p:2234-2243

DOI: 10.1016/j.physa.2010.01.045

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