ALGORITHMIC TRADING OF CO-INTEGRATED ASSETS

Álvaro Cartea () and Sebastian Jaimungal ()
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Sebastian Jaimungal: #x2020;Department of Statistical Sciences, University of Toronto, Toronto, Canada

International Journal of Theoretical and Applied Finance (IJTAF), 2016, vol. 19, issue 06, 1-18

Abstract: We assume that the drift in the returns of asset prices consists of an idiosyncratic component and a common component given by a co-integration factor. We analyze the optimal investment strategy for an agent who maximizes expected utility of wealth by dynamically trading in these assets. The optimal solution is constructed explicitly in closed-form and is shown to be affine in the co-integration factor. We calibrate the model to three assets traded on the Nasdaq exchange (Google, Facebook, and Amazon) and employ simulations to showcase the strategy’s performance.

Keywords: Pairs trading; algorithmic trading; high-frequency trading; co-integration; short-term alpha; stochastic control (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (10)

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DOI: 10.1142/S0219024916500382

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