Optimal mean-reverting spread trading: nonlinear integral equation approach
| Autor: | Tim Leung, Yerkin Kitapbayev |
|---|---|
| Rok vydání: | 2017 |
| Předmět: |
Mathematical optimization
Quantitative Finance - Trading and Market Microstructure 050208 finance Mathematical finance 05 social sciences Ornstein–Uhlenbeck process 91G20 60G40 01 natural sciences Integral equation Trading and Market Microstructure (q-fin.TR) FOS: Economics and business 010104 statistics & probability Position (vector) 0502 economics and business Mean reversion Free boundary problem Applied mathematics Trading strategy Optimal stopping 0101 mathematics General Economics Econometrics and Finance Finance Spread trade Mathematics |
| Zdroj: | Annals of Finance. 13:181-203 |
| ISSN: | 1614-2454 1614-2446 |
| DOI: | 10.1007/s10436-017-0295-y |
| Popis: | We study several optimal stopping problems that arise from trading a mean-reverting price spread over a finite horizon. Modeling the spread by the Ornstein–Uhlenbeck process, we analyze three different trading strategies: (i) the long-short strategy; (ii) the short-long strategy, and (iii) the chooser strategy, i.e. the trader can enter into the spread by taking either long or short position. In each of these cases, we solve an optimal double stopping problem to determine the optimal timing for starting and subsequently closing the position. We utilize the local time-space calculus of Peskir (J Theor Probab 18:499–535, 2005a) and derive the nonlinear integral equations of Volterra-type that uniquely characterize the boundaries associated with the optimal timing decisions in all three problems. These integral equations are used to numerically compute the optimal boundaries. |
| Databáze: | OpenAIRE |
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