A Diversification Framework for Multiple Pairs Trading Strategies

Kiseop Lee, Tim Leung and Boming Ning ()
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Kiseop Lee: Department of Statistics, Purdue University, West Lafayette, IN 47906, USA
Boming Ning: Department of Statistics, Purdue University, West Lafayette, IN 47906, USA

Risks, 2023, vol. 11, issue 5, 1-18

Abstract: We propose a framework for constructing diversified portfolios with multiple pairs trading strategies. In our approach, several pairs of co-moving assets are traded simultaneously, and capital is dynamically allocated among different pairs based on the statistical characteristics of the historical spreads. This allows us to further consider various portfolio designs and rebalancing strategies. Working with empirical data, our experiments suggest the significant benefits of diversification within our proposed framework.

Keywords: pairs trading; Ornstein–Uhlenbeck process; diversification; portfolio allocation; mean reversion budgeting (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:gam:jrisks:v:11:y:2023:i:5:p:93-:d:1148312

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