Optimal Trading with Cointegrated Pairs of Stocks

Yuji Yamada and James A. Primbs
Additional contact information
Yuji Yamada: Graduate School of Business Sciences, University of Tsukuba, 3-29-1 Otsuka, Bunkyo-ku, Tokyo 112-0012, Japan
James A. Primbs: Management Science and Engineering, Stanford University, Stanford, CA 94305-4121, USA

Chapter 9 in Recent Advances in Financial Engineering 2011, 2012, pp 183-202 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractIn general, stock prices are believed to evolve according to a random walk and thus the prices of the stock market cannot be predicted. However, in some stock markets, we can observe that there are pairs of stocks whose movements look similar, characterized as "cointegration of pairs of stocks." In this paper, we demonstrate how to search for cointegrated pairs of stocks and construct optimal portfolios based on the following two techniques: (1) Mean-variance optimization which solves a single period problem and (2) Expected utility maximization in the terminal wealth at a specified time in the future. We perform out-of-sample simulations using empirical stock price data in Japan, and then examine the effects of parameter estimation periods and transaction costs.

Keywords: Financial Engineering; Mathematical Finance; Money & Banking; Risk Management; Real Option; Corporate Finance; Computational Finance (search for similar items in EconPapers)
Date: 2012
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.worldscientific.com/doi/pdf/10.1142/9789814407335_0009 (application/pdf)
https://www.worldscientific.com/doi/abs/10.1142/9789814407335_0009 (text/html)
Ebook Access is available upon purchase.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:wschap:9789814407335_0009

Ordering information: This item can be ordered from

Access Statistics for this chapter

More chapters in World Scientific Book Chapters from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().