This paper studics thc optimal pairs trading stratcgy of the mcan-variance(MV)objective function under a continuous-time cointegration model with a common stochastic factor.Although this common stochastic factor is no...This paper studics thc optimal pairs trading stratcgy of the mcan-variance(MV)objective function under a continuous-time cointegration model with a common stochastic factor.Although this common stochastic factor is not directly tradable,it significantly impacts asset prices.We first provide a semiclosed-form solution under a general model.We then specify the common factor model to be a mean-reverting process with time-varying parameters and provide closed-form optimal strategies for pairs trading with fixed and flexible ratios,respectively.Empirical analysis based on historical data from Chinese sccuritics markcts shows thc cffcctivencss of both optimal stratcgics.The optimal flcxiblc-ratio strategy outperforms the optimal fixed-ratio strategy in terms of both profit and risk.展开更多
文摘This paper studics thc optimal pairs trading stratcgy of the mcan-variance(MV)objective function under a continuous-time cointegration model with a common stochastic factor.Although this common stochastic factor is not directly tradable,it significantly impacts asset prices.We first provide a semiclosed-form solution under a general model.We then specify the common factor model to be a mean-reverting process with time-varying parameters and provide closed-form optimal strategies for pairs trading with fixed and flexible ratios,respectively.Empirical analysis based on historical data from Chinese sccuritics markcts shows thc cffcctivencss of both optimal stratcgics.The optimal flcxiblc-ratio strategy outperforms the optimal fixed-ratio strategy in terms of both profit and risk.
