Algorithmic trading of co-integrated assets

Journal article

Abstract:: We assume that the drift in the returns of asset prices consists of an idiosyncratic component and a common component given by a co-integration factor. We analyze the optimal investment strategy for an agent who maximizes expected utility of wealth by dynamically trading in these assets. The optimal solution is constructed explicitly in closed-form and is shown to be affine in the co-integration factor. We calibrate the model to three assets traded on the Nasdaq exchange (Google, Facebook, and Amazon) and employ simulations to showcase the strategy's performance.

Files:: Cartea_and_Jaimungal_2017_Algorithmic_trading_of.pdf

(Preview, Accepted manuscript, pdf, 373.4KB, Terms of use)

Publisher:: World Scientific Publishing
Journal:: International Journal of Theoretical and Applied Finance More from this journal
Volume:: 19
Issue:: 6
Pages:: 1650038
Publication date:: 2016-07-19
Acceptance date:: 2016-05-23
DOI:: 10.1142/S0219024916500382
EISSN:: 1793-6322
ISSN:: 0219-0249

Language:: English
Keywords:: short-term alpha

high-frequency trading

Pairs trading

stochastic control

co-integration

algorithmic trading
Pubs id:: pubs:624181
UUID:: uuid:3d6fa076-3b21-4739-8316-8b7fa95317bd
Local pid:: pubs:624181
Source identifiers:: 624181
Deposit date:: 2016-05-26
ARK identifier:: ark:/29072/ora_3d6fa0763b21473983168b7fa95317bd

Copyright holder:: World Scientific Publishing Co
Notes:: This is the accepted manuscript version of the article. The final version is available online from World Scientific Publishing at https://dx.doi.org/10.1142/S0219024916500382

Licence:: Terms and Conditions of Use for Oxford University Research Archive

If you are the owner of this record, you can report an update to it here: Report update to this record