Optimal switching for the pairs trading rule A viscosity solutions approach

Title:	Optimal switching for the pairs trading rule A viscosity solutions approach
Authors:	Ngo, M.-M. Pham, H.
Keywords:	Mean-reverting process;Optimal switching;Pairs trading;Viscosity solutions
Issue Date:	2016
Publisher:	Academic Press Inc.
Citation:	Scopus
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), one long and the other short and one short and the other long. A fixed commission cost is charged with each transaction. We use a viscosity solutions approach to prove the existence and the explicit characterisation 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, 1 September 2016, Pages 403-425
URI:	http://www.sciencedirect.com/science/article/pii/S0022247X16003000 http://repository.vnu.edu.vn/handle/VNU_123/33445
ISSN:	0022247X
Appears in Collections:	Bài báo của ĐHQGHN trong Scopus