Abstract

http://ssrn.com/abstract=2014271
 


 



Dynamic Pairs Trading Using the Stochastic Control Approach


Agnes Tourin


NYU Poly - Department of Finance and Risk Engineering

Raphael Yan


BlackRock, Inc

March 1, 2012

Journal of Economic Dynamics and Control, 2013

Abstract:     
We propose a model for analyzing dynamic pairs trading strategies using the stochastic control approach. The model is explored in an optimal portfolio setting, where the portfolio consists of a bank account and two co-integrated stocks and the objective is to maximize for a fixed time horizon, the expected terminal utility of wealth. For the exponential utility function, we reduce the problem to a linear parabolic Partial Differential Equation which can be solved in closed form. In particular, we exhibit the optimal positions in the two stocks.

Number of Pages in PDF File: 20

Keywords: Optimal Stochastic Control, Pairs trading, Co-integration, Hamilton-Jacobi-Bellman equation

JEL Classification: C61

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Date posted: March 9, 2012 ; Last revised: February 7, 2014

Suggested Citation

Tourin, Agnes and Yan, Raphael, Dynamic Pairs Trading Using the Stochastic Control Approach (March 1, 2012). Journal of Economic Dynamics and Control, 2013. Available at SSRN: http://ssrn.com/abstract=2014271 or http://dx.doi.org/10.2139/ssrn.2014271

Contact Information

Agnes Tourin (Contact Author)
NYU Poly - Department of Finance and Risk Engineering ( email )
Brooklyn, NY 11201
United States

Raphael Yan
BlackRock, Inc ( email )
55 East 52nd Street
New York City, NY 10055
United States
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