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Optimal pairs trading with dynamic mean-variance objective

Author

Listed:
  • Dong-Mei Zhu

    (Southeast University)

  • Jia-Wen Gu

    (Southern University of Science and Technology)

  • Feng-Hui Yu

    (ETH)

  • Tak-Kuen Siu

    (Macquarie University)

  • Wai-Ki Ching

    (The University of Hong Kong)

Abstract

Pairs trading is a typical example of a convergence trading strategy. Investors buy relatively under-priced assets simultaneously, and sell relatively over-priced assets to exploit temporary mispricing. This study examines optimal pairs trading strategies under symmetric and non-symmetric trading constraints. Under the assumption that the price spread of a pair of correlated securities follows a mean-reverting Ornstein-Uhlenbeck(OU) process, analytical trading strategies are obtained under a mean-variance(MV) framework. Model estimation and empirical studies on trading strategies have been conducted using data on pairs of stocks and futures traded on China’s securities market. These results indicate that pairs trading strategies have fairly good performance.

Suggested Citation

  • Dong-Mei Zhu & Jia-Wen Gu & Feng-Hui Yu & Tak-Kuen Siu & Wai-Ki Ching, 2021. "Optimal pairs trading with dynamic mean-variance objective," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 94(1), pages 145-168, August.
    • Handle: RePEc:spr:mathme:v:94:y:2021:i:1:d:10.1007_s00186-021-00751-z
    DOI: 10.1007/s00186-021-00751-z
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    References listed on IDEAS

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    Cited by:

    1. Fenghui Yu & Wai-Ki Ching & Chufang Wu & Jia-Wen Gu, 2023. "Optimal Pairs Trading Strategies: A Stochastic Mean–Variance Approach," Journal of Optimization Theory and Applications, Springer, vol. 196(1), pages 36-55, January.
    2. Yaoyuan Zhang & Dewen Xiong, 2023. "Optimal Strategy of the Dynamic Mean-Variance Problem for Pairs Trading under a Fast Mean-Reverting Stochastic Volatility Model," Mathematics, MDPI, vol. 11(9), pages 1-19, May.
    3. Jaydip Sen, 2022. "Designing Efficient Pair-Trading Strategies Using Cointegration for the Indian Stock Market," Papers 2211.07080, arXiv.org.

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