Robust dynamic pairs trading with cointegration

Mei Choi CHIU, Hoi Ying WONG

Research output: Contribution to journalArticles

4 Citations (Scopus)

Abstract

This paper investigates the robust optimal pairs trading using the concept of equivalent probability measures and a penalty function associated with the confidence in parameter estimates when the parameters in the drift term of the continuous-time cointegration model are estimated with errors. A closed-form solution is derived for the robust pairs trading rule. We compare the robust pairs trading rule against its non-robust counterpart using simulations and real data. The robust strategy is empirically more stable and less volatile. Copyright © 2018 Elsevier B.V. All rights reserved.
Original languageEnglish
Pages (from-to)225-232
JournalOperations Research Letters
Volume46
Issue number2
Early online dateJan 2018
DOIs
Publication statusPublished - 2018

Citation

Chiu, M. C., & Wong, H. Y. (2018). Robust dynamic pairs trading with cointegration. Operations Research Letters, 46(2), 225-232. doi: 10.1016/j.orl.2018.01.006

Keywords

  • Cointegration
  • Pairs trading
  • Robust decision rule

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