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An Application of the Ornstein-Uhlenbeck Process to Pairs Trading

Author

Listed:
  • Jirat Suchato
  • Sean Wiryadi
  • Danran Chen
  • Ava Zhao
  • Michael Yue

Abstract

We conduct a preliminary analysis of a pairs trading strategy using the Ornstein-Uhlenbeck (OU) process to model stock price spreads. We compare this approach to a naive pairs trading strategy that uses a rolling window to calculate mean and standard deviation parameters. Our findings suggest that the OU model captures signals and trends effectively but underperforms the naive model on a risk-return basis, likely due to non-stationary pairs and parameter tuning limitations.

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  • Jirat Suchato & Sean Wiryadi & Danran Chen & Ava Zhao & Michael Yue, 2024. "An Application of the Ornstein-Uhlenbeck Process to Pairs Trading," Papers 2412.12458, arXiv.org.
    • Handle: RePEc:arx:papers:2412.12458
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    File URL: http://arxiv.org/pdf/2412.12458
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