Bertram's Pairs Trading Strategy with Bounded Risk

Vladim\'ir Hol\'y and Michal \v{C}ern\'y

Papers from arXiv.org

Abstract: Finding Bertram's optimal trading strategy for a pair of cointegrated assets following the Ornstein--Uhlenbeck price difference process can be formulated as an unconstrained convex optimization problem for maximization of expected profit per unit of time. This model is generalized to the form where the riskiness of profit, measured by its per-time-unit volatility, is controlled (e.g. in case of existence of limits on riskiness of trading strategies imposed by regulatory bodies). The resulting optimization problem need not be convex. In spite of this undesirable fact, it is demonstrated that the problem is still efficiently solvable. In addition, the problem that parameters of the price difference process are never known exactly and are imprecisely estimated from an observed finite sample is investigated (recalling that this problem is critical for practice). It is shown how the imprecision affects the optimal trading strategy by quantification of the loss caused by the imprecise estimate compared to a theoretical trader knowing the parameters exactly. The main results focus on the geometric and optimization-theoretic viewpoint of the risk-bounded trading strategy and the imprecision resulting from the statistical estimates.

Date: 2021-02, Revised 2021-06
New Economics Papers: this item is included in nep-cwa and nep-rmg
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Published in Hol\'y, V., & \v{C}ern\'y, M. (2022). Bertram's Pairs Trading Strategy with Bounded Risk. Central European Journal of Operations Research, 30(2), 667-682

Downloads: (external link)
http://arxiv.org/pdf/2102.04160 Latest version (application/pdf)

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:arx:papers:2102.04160

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators (help@arxiv.org).