Trading Cointegrated Assets with Price Impact

32 Pages Posted: 28 Oct 2015 Last revised: 15 Jul 2018

See all articles by Álvaro Cartea

Álvaro Cartea

University of Oxford; University of Oxford - Oxford-Man Institute of Quantitative Finance

Luhui Gan

University of Toronto

Sebastian Jaimungal

University of Toronto - Department of Statistics

Date Written: October 27, 2015

Abstract

Executing a basket of co-integrated assets is an important task facing investors. Here, we show how to do this accounting for the informational advantage gained from assets within and outside the basket, as well as for the permanent price impact of market orders (MOs) from all market participants, and the temporary impact that the agent's MOs have on prices. The execution problem is posed as an optimal stochastic control problem and we demonstrate that, under some mild conditions, the value function admits a closed-form solution, and prove a verification theorem. Furthermore, we use data of five stocks traded in the Nasdaq exchange to estimate the model parameters and use simulations to illustrate the performance of the strategy. As an example, the agent liquidates a portfolio consisting of shares in INTC and SM. We show that including the information provided by three additional assets (FARO, NTAP, ORCL) considerably improves the strategy's performance; for the portfolio we execute, it outperforms the multi-asset version of Almgren-Chriss by approximately 4 to 4.5 basis points.

Keywords: algorithmic trading, optimal execution, price impact, cointegration, cross price impact

JEL Classification: C6, C61, D81, G1, G13

Suggested Citation

Cartea, Álvaro and Gan, Luhui and Jaimungal, Sebastian, Trading Cointegrated Assets with Price Impact (October 27, 2015). Available at SSRN: https://ssrn.com/abstract=2681309 or http://dx.doi.org/10.2139/ssrn.2681309

Álvaro Cartea

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

Luhui Gan

University of Toronto ( email )

Toronto, Ontario M5S 3G8
Canada

Sebastian Jaimungal (Contact Author)

University of Toronto - Department of Statistics ( email )

100 St. George St.
Toronto, Ontario M5S 3G3
Canada

HOME PAGE: http://http:/sebastian.statistics.utoronto.ca

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
721
Abstract Views
2,477
rank
41,824
PlumX Metrics