2016（其他）Optimal Pairs Trading with Time-Varying Volatility.pdfVIP

Keywords: Stochastic control; pairs trading; cointegration; Constant Elas- ticity of Variance; statistical arbitrage 1 Optimal Pairs Trading with Time-Varying Volatility Thomas Nanfeng Li , Agnès Tourin January 6, 2016 Abstract We propose a pairs trading model that incorporates a time-varying volatility of the Constant Elasticity of Variance type. Our approach is based on stochastic control techniques; given a fixed time horizon and a portfolio of two cointegrated assets, we define the trading strategies as the portfolio weights maximizing the expected power utility from terminal wealth. We compute the optimal pairs strategies by using a Finite Difference method. Finally, we illustrate our results by conduct- ing tests on historical market data at daily frequency. The parameters are estimated by the Generalized Method of Moments. New York University Tandon School of Engineering. Department of Mathematics. 6 Metrotech Center, Brooklyn, NY 11201. nl747@nyu.edu Corresponding author: New York University Tandon School of Engineering. Depart- ment of Finance and Risk Engineering. Six Metrotech Center, Brooklyn, NY 11201, USA; (646) 997-3889. atourin@nyu.edu 2 1 Introduction This article extends the pairs trading model proposed in Tourin and Yan (2013) to incorporate time-varying volatility. In contrast to Tourin and Yan (2013), we are unable to derive a fully explicit solution for the optimal pairs trading strategies, even for a fully specified local volatility model. However, by using stochastic control techniques, we show that this proble