Optimal switching for the pairs trading rule: A viscosity solutions approach

http://repository.vnu.edu.vn/handle/VNU_123/26862

This paper studies the problem of determining the optimal cut-off for pairs trading rules.

We consider two cointegrated assets whose spread is modelled by a general mean-reverting process, and the optimal pair trading rule is formulated as an optimal switching problem between three regimes: flat position (no holding stocks), long one short the other and short one long the other.

A fixed commission cost is charged with each transaction.

We use a viscosity solutions approach to prove the existence and the explicit characterization of cut-off points via the resolution of quasi-algebraic equations. We illustrate our results by numerical simulations.

Title: 

	Optimal switching for the pairs trading rule: A viscosity solutions approach
Authors:	Ngo, Minh-Man Pham, Huyen
Keywords:	Pairs trading Viscosity solutions. Mean-reverting process Optimal switching
Issue Date:	2016
Publisher:	H. : ĐHQGHN
Citation:	ISIKNOWLEDGE
Abstract:	This paper studies the problem of determining the optimal cut-off for pairs trading rules. We consider two cointegrated assets whose spread is modelled by a general mean-reverting process, and the optimal pair trading rule is formulated as an optimal switching problem between three regimes: flat position (no holding stocks), long one short the other and short one long the other. A fixed commission cost is charged with each transaction. We use a viscosity solutions approach to prove the existence and the explicit characterization of cut-off points via the resolution of quasi-algebraic equations. We illustrate our results by numerical simulations.
Description:	JOURNAL OF MATHEMATICAL ANALYSIS AND APPLICATIONS Volume: 441 Issue: 1 Pages: 403-425 ; TNS06393
URI:	http://repository.vnu.edu.vn/handle/VNU_123/26862
Appears in Collections:	Bài báo của ĐHQGHN trong Web of Science