Research On Matching Trading Strategy

This paper mainly discuss the full components which are essential in pairs trading, concluding open a position, hold the position and close the position. The three steps are discussed independently through which the idea of mean reversion is expressed. First, under the assumption of mean reversion, we define specific times of the pairs’ value as the rule of opening a position. Then, we use the dynamic continuous time Markowitz mean variance model to get the weights of every pairs position under a certain amount total wealth. The same as the first step, we also take advantage of the hypothesis of the mean reversion property of the pairs’value. This step try to solve the so-called dynamic holding problem. Third, succeeding the assumption of mean reversion, we convert the problem of selecting the optimal closing time to the one of America option’s. Doing this conversion is due to the PDE of the option value can be got conveniently. So that we can use finite difference method to derive the optimal exercise boundary.