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On the efficacy of optimized exit rule for mean reversion trading

Author

Listed:
  • Donovan Lee

    (Mathematics Department, Duke University, Durham, NC 27708, USA)

  • Tim Leung

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

Abstract

We investigate the effect of using an optimized exit rule on pairs trading. For every asset pair, we optimize the positions so that resulting intraday portfolio value is best fitted to an Ornstein–Uhlenbeck (OU) process through maximum likelihood estimation. Using various asset pairs, we examine the risks and returns of pairs trading strategies with and without an optimize exit rule. We provide empirical evidence that using an optimized exit rule improves the profitability of the trades and reduces turnovers.

Suggested Citation

  • Donovan Lee & Tim Leung, 2020. "On the efficacy of optimized exit rule for mean reversion trading," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 7(03), pages 1-20, September.
    • Handle: RePEc:wsi:ijfexx:v:07:y:2020:i:03:n:s2424786320500243
    DOI: 10.1142/S2424786320500243
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