Study On The Application Of Stochastic Control Method In Pairs Trading

Primitive pairs trading model is to select the same direction in the history of the two stocks,when the shape of the stock of a divergence,and stock for the spread of more than a fixed value,shorting higher shares of stock,do more low price stock,when the stock to the spread of fluctuate in the normal range,calculate the profits and earnings after unwinding.This paper explores and studies the application and promotion of stochastic control method in pairs trading,and constructs a pairs trading model based on stochastic control principle and put,providing a new paired trading strategy.The problem of profit maximization in paired trading is solved by using the dynamic programming principle and the stochastic control principle,and the stochastic control method is used to establish the pairs trading model,calculate the estimation of parameters in the model and optimize the weight of paired assets in the portfolio.Subsequently,this strategy is empirically analyzed using stocks listed on the Shanghai stock exchange.At the same time,this paper makes an empirical analysis of the distance-based pair trading strategy and makes a comparative study of the results of the pair trading.On two different pairs trading model is found that under the different indicators of pairs trading model based on stochastic control method of pairs trading model based on distance method is the total revenue of 1.15 times,and the former in the annualized yield,annualized volatility,maximum retracement rate and Sharpe index of performance is superior to the latter.