| Abstract: |
| This talk studies optimal strategies for pairs trading, in which a long position
is taken in a weaker stock and a short position in a stronger one following
price divergence. Stock prices are modeled by general geometric Brownian
motions, and transaction costs are incorporated. The optimal trading policy
is characterized by threshold curves derived from Hamilton Jacobi Bellman
equations. Several recent developments are also reported, including pairs
trading with stop-loss constraints and trading under additional market
constraints. |
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