Optimal pairs trading with dynamic mean-variance objective

Dong-Mei Zhu (), Jia-Wen Gu (), Feng-Hui Yu (), Tak Kuen Siu and Wai-Ki Ching ()
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Dong-Mei Zhu: Southeast University
Jia-Wen Gu: Southern University of Science and Technology
Feng-Hui Yu: ETH
Wai-Ki Ching: The University of Hong Kong

Mathematical Methods of Operations Research, 2021, vol. 94, issue 1, No 6, 145-168

Abstract: Abstract Pairs 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.

Keywords: Dynamic mean-variance (MV); Ornstein-Uhlenbeck (OU); Pairs trading; Time inconsistency (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s00186-021-00751-z

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