Mean-Reversion and Optimization

Zura Kakushadze

Papers from arXiv.org

Abstract: The purpose of these notes is to provide a systematic quantitative framework - in what is intended to be a "pedagogical" fashion - for discussing mean-reversion and optimization. We start with pair trading and add complexity by following the sequence "mean-reversion via demeaning -> regression -> weighted regression -> (constrained) optimization -> factor models". We discuss in detail how to do mean-reversion based on this approach, including common pitfalls encountered in practical applications, such as the difference between maximizing the Sharpe ratio and minimizing an objective function when trading costs are included. We also discuss explicit algorithms for optimization with linear costs, constraints and bounds.

Date: 2014-08, Revised 2016-02
New Economics Papers: this item is included in nep-cmp
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Published in Journal of Asset Management 16(1) (2015) 14-40

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1408.2217

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