Model-based pairs trading in the bitcoin markets

P. S. Lintilhac and A. Tourin

Quantitative Finance, 2017, vol. 17, issue 5, 703-716

Abstract: We propose an optimal dynamic pairs trading strategy model for a portfolio of cointegrated assets. Using stochastic control techniques, we compute analytically the optimal portfolio weights and relate our result to several other strategies commonly used by practitioners, including the static double-threshold strategy. Finally, we apply our model to a bitcoin portfolio and conduct an out-of-sample test with historical data from three exchanges, with two cointegrating relations.

Date: 2017
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DOI: 10.1080/14697688.2016.1231928

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