Related papers: An Optimal Pairs-Trading Rule
We propose a pairs trading model that incorporates a time-varying volatility of the Constant Elasticity of Variance type. Our approach is based on stochastic control techniques; given a fixed time horizon and a portfolio of two…
In this paper, we explore an optimal timing strategy for the trading of price spreads exhibiting mean-reverting characteristics. A sequential optimal stopping framework is formulated to analyze the optimal timings for both entering and…
Pairs trading, a strategy that capitalizes on price movements of asset pairs driven by similar factors, has gained significant popularity among traders. Common practice involves selecting highly cointegrated pairs to form a portfolio, which…
It is well-known that using delta hedging to hedge financial options is not feasible in practice. Traders often rely on discrete-time hedging strategies based on fixed trading times or fixed trading prices (i.e., trades only occur if the…
This article examines arbitrage investment in a mispriced asset when the mispricing follows the Ornstein-Uhlenbeck process and a credit-constrained investor maximizes a generalization of the Kelly criterion. The optimal differentiable and…
We study the problem of dynamically trading multiple futures contracts with different underlying assets. To capture the joint dynamics of stochastic bases for all traded futures, we propose a new model involving a multi-dimensional scaled…
The problem of stock hedging is reconsidered in this paper, where a put option is chosen from a set of available put options to hedge the market risk of a stock. A formula is proposed to determine the probability that the potential loss…
Finding Bertram's optimal trading strategy for a pair of cointegrated assets following the Ornstein--Uhlenbeck price difference process can be formulated as an unconstrained convex optimization problem for maximization of expected profit…
We carry out a large-scale empirical data analysis to examine the efficiency of the so-called pairs trading. On the basis of relevant three thresholds, namely, starting, profit-taking, and stop-loss for the `first-passage process' of the…
We study a dynamic portfolio optimization problem related to convergence trading, which is an investment strategy that exploits temporary mispricing by simultaneously buying relatively underpriced assets and selling short relatively…
In this article we study an optimal stopping/optimal control problem which models the decision facing a risk-averse agent over when to sell an asset. The market is incomplete so that the asset exposure cannot be hedged. In addition to the…
We study a natural combinatorial pricing problem for sequentially arriving buyers with equal budgets. Each buyer is interested in exactly one pair of items and purchases this pair if and only if, upon arrival, both items are still available…
In a classical optimal stopping problem the aim is to maximize the expected value of a functional of a diffusion evaluated at a stopping time. This note considers optimal stopping problems beyond this paradigm. We study problems in which…
Traders buy and sell financial instruments in hopes of making profit, and brokers are responsible for the transaction. There are several hypotheses and conspiracy theories arguing that in some situations, brokers want their traders to lose…
We study the problem of selling an asset near its ultimate maximum in the minimax setting. The regret-based notion of a perfect stopping time is introduced. A perfect stopping time is uniquely characterized by its optimality properties and…
We consider the problem of dynamic buying and selling of shares from a collection of $N$ stocks with random price fluctuations. To limit investment risk, we place an upper bound on the total number of shares kept at any time. Assuming that…
We study several optimal stopping problems that arise from trading a mean-reverting price spread over a finite horizon. Modeling the spread by the Ornstein-Uhlenbeck process, we analyze three different trading strategies: (i) the long-short…
We propose a strategy for automated trading, outline theoretical justification of the profitability of this strategy and overview the hypothetical results in application to currency pairs trading. The proposed methodology relies on the…
An agent-based modelling methodology for the joint price evolution of two stocks is put forward. The method models future multidimensional price trajectories reflecting how a class of agents rebalance their portfolios in an operational way…
This paper studies an optimal trading problem that incorporates the trader's market view on the terminal asset price distribution and uninformative noise embedded in the asset price dynamics. We model the underlying asset price evolution by…