Academy of Mathematics and Systems Science, CAS Colloquia & Seminars
Speaker:
Prof. Qing ZHANG,Department of Mathematics, University of Georgia
Inviter:
Title:
Pairs-Trading
Time & Venue:
2015.7.22 10:00-11:00am N613
Abstract:
Pairs trading is one of the risk-neutral or statistical arbitrary-free trading stategies. The idea is to monitor two historically correlated securities. When divergence is underway, i.e., one stock moves up while the other moves down, a pairs trade is entered which consists of a pair to short the outperforming stock and to long the underperforming one. Such a strategy bets the ``spread'' between the two would eventually converge. In this talk, a difference of the pair is governed by a mean-reverting model. The objective is to trade the pair so as to maximize an overall return. A fixed commission cost is charged with each transaction. In addition, a stop-loss limit is imposed as a state constraint. The associated HJB equations (quasi-variational inequalities) are used to characterize the value functions. It is shown that the solution to the optimal stopping problem can be obtained by solving a number of quasi-algebraic equations.Numerical examples are also reported to demonstrate the results. This is a joint work with Q.S. Song.
Appendix：
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