IDEAS home Printed from https://ideas.repec.org/h/spr/lnechp/978-3-319-00912-4_6.html
   My bibliography  Save this book chapter

Adaptive Trading for Anti-correlated Pairs of Stocks

In: Artificial Economics and Self Organization

Author

Listed:
  • Chih-Hao Lin

    (Academia Sinica)

  • Sai-Ping Li

    (Academia Sinica)

  • K. Y. Szeto

    (The Hong Kong University of Science and Technology)

Abstract

The effect of anti-correlation between stocks in real stock market can be exploited for profit if one can also properly set the criterion for trading that takes into account the volatility of the stock pair. This complex problem of resource allocation for portfolio management of stocks is here simplified to a problem of adaptive trading with an investment criterion that evolves along with the time series of the stock data. The trend of the stock is modeled with standard stochastic dynamics, from which the volatility of the stock provides a criterion for investment on a two stock portfolio that consists of the anti-correlated pair using mean variance analysis that optimizes the return. The action of buy and sell of the two-stock portfolio will be based on the fractional return of the pair: when the fractional return of the pair is greater than an upper threshold of 1.01, the action “buy” is taken; and when this fractional return is less than a lower threshold of 0.99, the action “sell” is taken. Since both the volatility criterion for investment and the fractional return of the two-stock portfolio are time dependent, the entire trading scheme is adaptive. Comparison of this evolving strategy of investment with time-average performance of the respective stocks indicates a consistent superiority.

Suggested Citation

  • Chih-Hao Lin & Sai-Ping Li & K. Y. Szeto, 2014. "Adaptive Trading for Anti-correlated Pairs of Stocks," Lecture Notes in Economics and Mathematical Systems, in: Stephan Leitner & Friederike Wall (ed.), Artificial Economics and Self Organization, edition 127, pages 71-80, Springer.
    • Handle: RePEc:spr:lnechp:978-3-319-00912-4_6
    DOI: 10.1007/978-3-319-00912-4_6
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:lnechp:978-3-319-00912-4_6. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.