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A Diversification Framework for Multiple Pairs Trading Strategies

Author

Listed:
  • Kiseop Lee

    (Department of Statistics, Purdue University, West Lafayette, IN 47906, USA)

  • Tim Leung

    (Department of Applied Mathematics, University of Washington, Seattle, WA 98195, USA)

  • Boming Ning

    (Department of Statistics, Purdue University, West Lafayette, IN 47906, USA)

Abstract

We propose a framework for constructing diversified portfolios with multiple pairs trading strategies. In our approach, several pairs of co-moving assets are traded simultaneously, and capital is dynamically allocated among different pairs based on the statistical characteristics of the historical spreads. This allows us to further consider various portfolio designs and rebalancing strategies. Working with empirical data, our experiments suggest the significant benefits of diversification within our proposed framework.

Suggested Citation

  • Kiseop Lee & Tim Leung & Boming Ning, 2023. "A Diversification Framework for Multiple Pairs Trading Strategies," Risks, MDPI, vol. 11(5), pages 1-18, May.
    • Handle: RePEc:gam:jrisks:v:11:y:2023:i:5:p:93-:d:1148312
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    References listed on IDEAS

    as
    1. Brennan, Michael J & Schwartz, Eduardo S, 1990. "Arbitrage in Stock Index Futures," The Journal of Business, University of Chicago Press, vol. 63(1), pages 7-31, January.
    2. K. Triantafyllopoulos & G. Montana, 2011. "Dynamic modeling of mean-reverting spreads for statistical arbitrage," Computational Management Science, Springer, vol. 8(1), pages 23-49, April.
    3. Tim Leung & Yang Zhou, 2019. "Optimal dynamic futures portfolio in a regime-switching market framework," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 6(04), pages 1-27, December.
    4. Tim Leung & Yang Zhou, 2020. "Optimal dynamic futures portfolio in a regime-switching market framework," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 6(04), pages 1-27, February.
    5. Marco Avellaneda & Jeong-Hyun Lee, 2010. "Statistical arbitrage in the US equities market," Quantitative Finance, Taylor & Francis Journals, vol. 10(7), pages 761-782.
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    Cited by:

    1. Tim Leung & Kevin W. Lu, 2023. "Monte Carlo Simulation for Trading Under a L\'evy-Driven Mean-Reverting Framework," Papers 2309.05512, arXiv.org, revised Jan 2024.

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