IDEAS home Printed from https://ideas.repec.org/h/wsi/wschap/9789814407335_0009.html
   My bibliography  Save this book chapter

Optimal Trading with Cointegrated Pairs of Stocks

In: Recent Advances In Financial Engineering 2011

Author

Listed:
  • Yuji Yamada

    (Graduate School of Business Sciences, University of Tsukuba, 3-29-1 Otsuka, Bunkyo-ku, Tokyo 112-0012, Japan)

  • James A. Primbs

    (Management Science and Engineering, Stanford University, Stanford, CA 94305-4121, USA)

Abstract

In general, stock prices are believed to evolve according to a random walk and thus the prices of the stock market cannot be predicted. However, in some stock markets, we can observe that there are pairs of stocks whose movements look similar, characterized as "cointegration of pairs of stocks." In this paper, we demonstrate how to search for cointegrated pairs of stocks and construct optimal portfolios based on the following two techniques: (1) Mean-variance optimization which solves a single period problem and (2) Expected utility maximization in the terminal wealth at a specified time in the future. We perform out-of-sample simulations using empirical stock price data in Japan, and then examine the effects of parameter estimation periods and transaction costs.

Suggested Citation

  • Yuji Yamada & James A. Primbs, 2012. "Optimal Trading with Cointegrated Pairs of Stocks," World Scientific Book Chapters, in: Akihiko Takahashi & Yukio Muromachi & Hidetaka Nakaoka (ed.), Recent Advances In Financial Engineering 2011, chapter 9, pages 183-202, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814407335_0009
    as

    Download full text from publisher

    File URL: https://www.worldscientific.com/doi/pdf/10.1142/9789814407335_0009
    Download Restriction: Ebook Access is available upon purchase.
    File URL: https://www.worldscientific.com/doi/abs/10.1142/9789814407335_0009
    Download Restriction: Ebook Access is available upon purchase.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    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:wsi:wschap:9789814407335_0009. 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: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscientific.com/page/worldscibooks .

    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.