Optimal Pairs Trading Strategies: A Stochastic Mean–Variance Approach

Yu，Fenghui1; Ching，Wai Ki2,3; Wu，Chufang2,4; Gu，Jia Wen4

2022

10.1007/s10957-022-02131-x

JOURNAL OF OPTIMIZATION THEORY AND APPLICATIONS   影响因子和分区

0022-3239

1573-2878

In this paper, we consider optimal pairs trading strategies in terms of static optimality and dynamic optimality under mean–variance criterion. The spread of the entity pairs is assumed to be mean-reverting and follows an Ornstein–Uhlenbeck process. A constrained optimal control problem is considered, and the Lagrange multiplier technique is adopted to transform the primal problem into a family of linear-quadratic optimal control problems that can be solved by the classical dynamic programming principle. Both solutions for static and dynamic optimal pairs trading problems are derived and discussed. We show that the “static and dynamic optimality” is a viable approach to the time-inconsistent control problem. Furthermore, numerical experiments are presented to demonstrate the performance of the optimal pairs trading strategies.

Dynamic optimality Mean–variance (MV) analysis Ornstein–Uhlenbeck (OU) Pairs trading Time inconsistency

SCI ; EI

英语

通讯

National Natural Science Foundation of China["11671158","11801262"] ; Research Grants Council of Hong Kong[17301522] ; Gruangdong Basic and Applied Basic Research Foundation 2021A[1515010031]

Operations Research & Management Science ; Mathematics

Operations Research & Management Science ; Mathematics, Applied

WOS:000886333800001

SPRINGER/PLENUM PUBLISHERS

20224713153046

Commerce ; Dynamic programming ; Optimal control systems ; Quadratic programming ; Stochastic systems

Control Systems:731.1 ; Optimization Techniques:921.5 ; Systems Science:961

ENGINEERING

2-s2.0-85142238878

Scopus

1.Delft Institute of Applied Mathematics,TU Delft,Delft,2628 CD,Netherlands
2.Advanced Modeling and Applied Computing Laboratory,Department of Mathematics,The University of Hong Kong,Pokfulam Road, Pokfulam,Hong Kong
3.Hughes Hall,Cambridge,Wollaston Road,United Kingdom
4.Department of Mathematics,Southern University of Science and Technology,Shenzhen,China

Yu，Fenghui,Ching，Wai Ki,Wu，Chufang,等. Optimal Pairs Trading Strategies: A Stochastic Mean–Variance Approach[J]. JOURNAL OF OPTIMIZATION THEORY AND APPLICATIONS,2022,196(1):36-55.

Yu，Fenghui,Ching，Wai Ki,Wu，Chufang,&Gu，Jia Wen.(2022).Optimal Pairs Trading Strategies: A Stochastic Mean–Variance Approach.JOURNAL OF OPTIMIZATION THEORY AND APPLICATIONS,196(1),36-55.

Yu，Fenghui,et al."Optimal Pairs Trading Strategies: A Stochastic Mean–Variance Approach".JOURNAL OF OPTIMIZATION THEORY AND APPLICATIONS 196.1(2022):36-55.