Related papers: Optimal Pairs Trading with Time-Varying Volatility
Predicting volatility in financial markets, including stocks, index ETFs, foreign exchange, and cryptocurrencies, remains a challenging task due to the inherent complexity and non-linear dynamics of these time series. In this study, I apply…
\begin{abstract} In this paper, we integrated the statistical arbitrage strategy, pairs trading, into the Black-Litterman model and constructed efficient mean-variance portfolios. Typically, pairs trading underperforms under volatile or…
Market timing is an investment technique that tries to continuously switch investment into assets forecast to have better returns. What is the likelihood of having a successful market timing strategy? With an emphasis on modeling…
We present a tractable non-independent increment process which provides a high modeling flexibility. The process lies on an extension of the so-called Harris chains to continuous time being stationary and Feller. We exhibit constructions,…
We study the optimal timing of derivative purchases in incomplete markets. In our model, an investor attempts to maximize the spread between her model price and the offered market price through optimally timing her purchase. Both the…
We propose an alternative approach towards cost mitigation in volatility-managed portfolios based on smoothing the predictive density of an otherwise standard stochastic volatility model. Specifically, we develop a novel variational Bayes…
In this paper, we propose a machine learning algorithm for time-inconsistent portfolio optimization. The proposed algorithm builds upon neural network based trading schemes, in which the asset allocation at each time point is determined by…
We apply numerical dynamic programming techniques to solve discrete-time multi-asset dynamic portfolio optimization problems with proportional transaction costs and shorting/borrowing constraints. Examples include problems with multiple…
We analyze an optimal trade execution problem in a financial market with stochastic liquidity. To this end we set up a limit order book model in which both order book depth and resilience evolve randomly in time. Trading is allowed in both…
This note continues investigation of randomness-type properties emerging in idealized financial markets with continuous price processes. It is shown, without making any probabilistic assumptions, that the strong variation exponent of…
This paper explores the effectiveness of high-frequency options trading strategies enhanced by advanced portfolio optimization techniques, investigating their ability to consistently generate positive returns compared to traditional long or…
We analyze the relative price change of assets starting from basic supply/demand considerations subject to arbitrary motivations. The resulting stochastic differential equation has coefficients that are functions of supply and demand. We…
An important revenue stream for electric battery operators is often arbitraging the hourly price spreads in the day-ahead auction. The optimal approach to this is challenging if risk is a consideration as this requires the estimation of…
Although stochastic volatility and GARCH (generalized autoregressive conditional heteroscedasticity) models have successfully described the volatility dynamics of univariate asset returns, extending them to the multivariate models with…
In this paper, we relax the power parameter of instantaneous variance and develop a new stochastic volatility plus jumps model that generalize the Heston model and 3/2 model as special cases. This model has two distinctive features. First,…
In the continuous time mean-variance model, we want to minimize the variance (risk) of the investment portfolio with a given mean at terminal time. However, the investor can stop the investment plan at any time before the terminal time. To…
We introduce a tractable multi-currency model with stochastic volatility and correlated stochastic interest rates that takes into account the smile in the FX market and the evolution of yield curves. The pricing of vanilla options on FX…
Building on a prominent agent-based model, we present a new structural stochastic volatility asset pricing model of fundamentalists vs. chartists where the prices are determined based on excess demand. Specifically, this allows for…
A pair-trading strategy is an approach that utilizes the fluctuations between prices of a pair of stocks in a short-term time frame, while in the long-term the pair may exhibit a strong association and co-movement pattern. When the prices…
To investigate a time-consistent optimal strategy for the continuous time mean-variance model, we develop a new method to establish the Bellman principle. Based on this new method, we obtain a time-consistent dynamic optimal strategy that…