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Optimal closing of a pair trade with a model containing jumps

Stig Larsson (Institutionen för matematiska vetenskaper, matematik) ; Carl Lindberg (Institutionen för matematiska vetenskaper, matematisk statistik) ; Marcus Warfheimer (Institutionen för matematiska vetenskaper, matematik)

A pair trade is a portfolio consisting of a long position in one asset and a short position in another, and it is a widely applied investment strategy in the financial industry. Recently, Ekström, Lindberg and Tysk studied the problem of optimally closing a pair trading strategy when the difference of the two assets is modelled by an Ornstein-Uhlenbeck process. In this paper we study the same problem, but the model is generalized to also include jumps. More precisely we assume that the above difference is an Ornstein-Uhlenbeck type process, driven by a Lévy process of finite activity. We prove a verification theorem and analyze a numerical method for the associated free boundary problem. We prove rigorous error estimates, which are used to draw some conclusions from numerical simulations.

Denna post skapades 2010-04-17. Senast ändrad 2014-09-02.
CPL Pubid: 119927


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Institutioner (Chalmers)

Institutionen för matematiska vetenskaper, matematik (2005-2016)
Institutionen för matematiska vetenskaper, matematisk statistik (2005-2016)


Annan matematik

Chalmers infrastruktur

Relaterade publikationer

Denna publikation ingår i:

Interacting particle systems in varying environment, stochastic domination in statistical mechanics and optimal pairs trading in finance

Ingår i serie

Preprint - Department of Mathematical Sciences, Chalmers University of Technology and Göteborg University 2010:22