On the efficacy of optimized exit rule for mean reversion trading

Donovan Lee () and Tim Leung
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Donovan Lee: Mathematics Department, Duke University, Durham, NC 27708, USA

International Journal of Financial Engineering (IJFE), 2020, vol. 07, issue 03, 1-20

Abstract: We investigate the effect of using an optimized exit rule on pairs trading. For every asset pair, we optimize the positions so that resulting intraday portfolio value is best fitted to an Ornstein–Uhlenbeck (OU) process through maximum likelihood estimation. Using various asset pairs, we examine the risks and returns of pairs trading strategies with and without an optimize exit rule. We provide empirical evidence that using an optimized exit rule improves the profitability of the trades and reduces turnovers.

Keywords: Pairs trading; mean reversion; optimal stopping; maximum likelihood estimation; stop-loss (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1142/S2424786320500243

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