Analytic Value Function for Pairs Trading Strategy With a Levy-Driven Ornstein-Uhlenbeck Process

2020 ◽  
Author(s):  
Lan Wu ◽  
Xin Zang ◽  
Hongxin Zhao
Keyword(s):  
Value Function ◽  
Trading Strategy ◽  
Pairs Trading ◽  
Uhlenbeck Process ◽  
Ornstein Uhlenbeck Process

Pairs Trading with Opportunity Cost

2014 ◽  
Vol 51 (01) ◽  
pp. 282-286 ◽  
Author(s):  
Carl Lindberg
Keyword(s):  
Opportunity Cost ◽  
Trading Strategy ◽  
The Other ◽  
Recent History ◽  
Investment Opportunity ◽  
Financial Industry ◽  
Pairs Trading ◽  
Uhlenbeck Process ◽  
Optimal Liquidation ◽  
Ornstein Uhlenbeck Process

Pairs trading is a trading strategy which is used very frequently in the financial industry. An investment opportunity arises when the spread between two assets, which historically have exhibited autoregressive behavior, deviates from its recent history. In this case, the investor takes a long position in the asset which is expected to outperform going forward and finances this by taking a short position in the other one. If the spread converges, the investor can close both positions to generate a profit. We model the spread between two assets as an Ornstein-Uhlenbeck process and assume a constant opportunity cost. We then study the optimal liquidation strategy for an investor who wants to optimize profit in excess of the opportunity cost. Including this cost is important from an applied perspective, as the performance of any investment is always evaluated relative to the performance of the opportunity set.

scholarly journals Pairs Trading with Opportunity Cost

2014 ◽  
Vol 51 (1) ◽  
pp. 282-286 ◽  
Author(s):  
Carl Lindberg
Keyword(s):  
Opportunity Cost ◽  
Trading Strategy ◽  
The Other ◽  
Recent History ◽  
Investment Opportunity ◽  
Financial Industry ◽  
Pairs Trading ◽  
Uhlenbeck Process ◽  
Optimal Liquidation ◽  
Ornstein Uhlenbeck Process

Pairs trading is a trading strategy which is used very frequently in the financial industry. An investment opportunity arises when the spread between two assets, which historically have exhibited autoregressive behavior, deviates from its recent history. In this case, the investor takes a long position in the asset which is expected to outperform going forward and finances this by taking a short position in the other one. If the spread converges, the investor can close both positions to generate a profit. We model the spread between two assets as an Ornstein-Uhlenbeck process and assume a constant opportunity cost. We then study the optimal liquidation strategy for an investor who wants to optimize profit in excess of the opportunity cost. Including this cost is important from an applied perspective, as the performance of any investment is always evaluated relative to the performance of the opportunity set.

On the sensibility of the Pairs Trading strategy: the case of the FTS stock market index

2020 ◽  
Vol 38 (3) ◽  
Author(s):  
Ainhoa Fernández-Pérez ◽  
María de las Nieves López-García ◽  
José Pedro Ramos Requena
Keyword(s):  
Standard Deviation ◽  
Stock Market ◽  
Trading Strategy ◽  
Stock Market Index ◽  
Pairs Trading ◽  
Empirical Application ◽  
Statistical Arbitrage ◽  
Market Index ◽  
Standard Deviations ◽  
Using Data

In this paper we present a non-conventional statistical arbitrage technique based in varying the number of standard deviations used to carry the trading strategy. We will show how values of 1 and 1,2 in the standard deviation provide better results that the classic strategy of Gatev et al (2006). An empirical application is performance using data of the FST100 index during the period 2010 to June 2019.

scholarly journals Time-changed fractional Ornstein-Uhlenbeck process

2020 ◽  
Vol 23 (2) ◽  
pp. 450-483 ◽  
Author(s):  
Giacomo Ascione ◽  
Yuliya Mishura ◽  
Enrica Pirozzi
Keyword(s):  
Planck Equation ◽  
Uhlenbeck Process ◽  
Fokker Planck Equation ◽  
Ornstein Uhlenbeck Process ◽  
Fokker Planck

AbstractWe define a time-changed fractional Ornstein-Uhlenbeck process by composing a fractional Ornstein-Uhlenbeck process with the inverse of a subordinator. Properties of the moments of such process are investigated and the existence of the density is shown. We also provide a generalized Fokker-Planck equation for the density of the process.

scholarly journals Using the Ornstein–Uhlenbeck process to model the evolution of interacting populations

2017 ◽  
Vol 429 ◽  
pp. 35-45 ◽  
Author(s):  
Krzysztof Bartoszek ◽  
Sylvain Glémin ◽  
Ingemar Kaj ◽  
Martin Lascoux
Keyword(s):  
Uhlenbeck Process ◽  
Interacting Populations ◽  
Ornstein Uhlenbeck Process

Empirical Investigation of an Equity Pairs Trading Strategy

2019 ◽  
Vol 65 (1) ◽  
pp. 370-389 ◽  
Author(s):  
Huafeng (Jason) Chen ◽  
Shaojun (Jenny) Chen ◽  
Zhuo Chen ◽  
Feng Li
Keyword(s):  
Empirical Investigation ◽  
Trading Strategy ◽  
Pairs Trading
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