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- Title
Optimal pairs trading of mean-reverting processes over multiple assets.
- Authors
Xie, Pengxu; Bai, Lihua; Zhang, Huayue
- Abstract
This paper studies multi-asset pairs trading strategies of maximizing the expected exponential utility of terminal wealth. We model the log-relationship between each pair of stock prices as an Ornstein-Uhlenbeck (O-U) process, and formulate a portfolio optimization problem. Using the classical stochastic control approach based on the Hamilton-Jacobi-Bellman (HJB) equation, we characterize the optimal strategies and provide a verification result for the value function. Finally, we give some numerical results to show the characteristics of pairs trading.
- Subjects
PORTFOLIO management (Investments); EXPECTED utility; STOCK prices; HAMILTON-Jacobi-Bellman equation; ORNSTEIN-Uhlenbeck process
- Publication
Numerical Algebra, Control & Optimization, 2023, Vol 13, Issue 3/4, p1
- ISSN
2155-3289
- Publication type
Article
- DOI
10.3934/naco.2022014