Optimal Mean Reversion Trading With Transaction Costs And Stop Loss Exit
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Optimal Mean Reversion Trading With Transaction Costs And Stop Loss Exit
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Author : Tim Leung
language : en
Publisher:
Release Date : 2015
Optimal Mean Reversion Trading With Transaction Costs And Stop Loss Exit written by Tim Leung and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2015 with categories.
Motivated by the industry practice of pairs trading, we study the optimal timing strategies for trading a mean-reverting price spread. An optimal double stopping problem is formulated to analyze the timing to start and subsequently liquidate the position subject to transaction costs. Modeling the price spread by an Ornstein-Uhlenbeck process, we apply a probabilistic methodology and rigorously derive the optimal price intervals for market entry and exit. As an extension, we incorporate a stop-loss constraint to limit the maximum loss. We show that the entry region is characterized by a bounded price interval that lies strictly above the stop-loss level. As for the exit timing, a higher stop-loss level always implies a lower optimal take-profit level. Both analytical and numerical results are provided to illustrate the dependence of timing strategies on model parameters such as transaction cost and stop-loss level.
Optimal Mean Reversion Trading
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Author : Tim Leung (Professor of industrial engineering)
language : en
Publisher: World Scientific
Release Date : 2015-11-26
Optimal Mean Reversion Trading written by Tim Leung (Professor of industrial engineering) and has been published by World Scientific this book supported file pdf, txt, epub, kindle and other format this book has been release on 2015-11-26 with Business & Economics categories.
"Optimal Mean Reversion Trading: Mathematical Analysis and Practical Applications provides a systematic study to the practical problem of optimal trading in the presence of mean-reverting price dynamics. It is self-contained and organized in its presentation, and provides rigorous mathematical analysis as well as computational methods for trading ETFs, options, futures on commodities or volatility indices, and credit risk derivatives. This book offers a unique financial engineering approach that combines novel analytical methodologies and applications to a wide array of real-world examples. It extracts the mathematical problems from various trading approaches and scenarios, but also addresses the practical aspects of trading problems, such as model estimation, risk premium, risk constraints, and transaction costs. The explanations in the book are detailed enough to capture the interest of the curious student or researcher, and complete enough to give the necessary background material for further exploration into the subject and related literature. This book will be a useful tool for anyone interested in financial engineering, particularly algorithmic trading and commodity trading, and would like to understand the mathematically optimal strategies in different market environments."--
Mean Reversion Trading With Sequential Deadlines And Transaction Costs
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Author : Yerkin Kitapbayev
language : en
Publisher:
Release Date : 2019
Mean Reversion Trading With Sequential Deadlines And Transaction Costs written by Yerkin Kitapbayev and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019 with categories.
We study the optimal timing strategies for trading a mean-reverting price process with a finite deadline to enter and a separate finite deadline to exit the market. The price process is modeled by a diffusion with an affine drift that encapsulates a number of well-known models, including the Ornstein-Uhlenbeck (OU) model, Cox-Ingersoll-Ross (CIR) model, Jacobi model, and inhomogeneous geometric Brownian motion (IGBM) model. We analyze three types of trading strategies: (i) the long-short (long to open, short to close) strategy; (ii) the short-long (short to open, long to close) strategy, and (iii) the chooser strategy whereby the trader has the added flexibility to enter the market by taking either a long or short position, and subsequently close the position. For each strategy, we solve an optimal double stopping problem with sequential deadlines, and determine the optimal timing of trades. Our solution methodology utilizes the local time-space calculus of Peskir (2005) to derive nonlinear integral equations of Volterra-type that uniquely characterize the trading boundaries. Numerical implementation of the integral equations provides examples of the optimal trading boundaries.
Optimal Mean Reversion Trading
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Author : Tim Leung
language : en
Publisher:
Release Date : 2019
Optimal Mean Reversion Trading written by Tim Leung and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019 with categories.
This book provides a systematic study on the optimal timing of trades in markets with mean-reverting price dynamics. We present a financial engineering approach that distills the core mathematical questions from different trading problems, and also incorporates the practical aspects of trading, such as model estimation, risk premia, risk constraints, and transaction costs, into our analysis. Self-contained and organized, the book not only discusses the mathematical framework and analytical results for the financial problems, but also gives formulas and numerical tools for practical implementation. A wide array of real-world applications are discussed, such as pairs trading of exchange-traded funds, dynamic portfolio of futures on commodities or volatility indices, and liquidation of options or credit risk derivatives.A core element of our mathematical approach is the theory of optimal stopping. For a number of the trading problems discussed herein, the optimal strategies are represented by the solutions to the corresponding optimal single/multiple stopping problems. This also leads to the analytical and numerical studies of the associated variational inequalities or free boundary problems. We provide an overview of our methodology and chapter outlines in the Introduction.Our objective is to design the book so that it can be useful for doctoral and masters students, advanced undergraduates, and researchers in financial engineering/mathematics, especially those who specialize in algorithmic trading, or have interest in trading exchange-traded funds, commodities, volatility, and credit risk, and related derivatives. For practitioners, we provide formulas for instant strategy implementation, propose new trading strategies with mathematical justification, as well as quantitative enhancement for some existing heuristic trading strategies.
Optimal Mean Reversion Trading Mathematical Analysis And Practical Applications
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Author : Tim Siu-tang Leung
language : en
Publisher: World Scientific
Release Date : 2015-11-26
Optimal Mean Reversion Trading Mathematical Analysis And Practical Applications written by Tim Siu-tang Leung and has been published by World Scientific this book supported file pdf, txt, epub, kindle and other format this book has been release on 2015-11-26 with Business & Economics categories.
Optimal Mean Reversion Trading: Mathematical Analysis and Practical Applications provides a systematic study to the practical problem of optimal trading in the presence of mean-reverting price dynamics. It is self-contained and organized in its presentation, and provides rigorous mathematical analysis as well as computational methods for trading ETFs, options, futures on commodities or volatility indices, and credit risk derivatives.This book offers a unique financial engineering approach that combines novel analytical methodologies and applications to a wide array of real-world examples. It extracts the mathematical problems from various trading approaches and scenarios, but also addresses the practical aspects of trading problems, such as model estimation, risk premium, risk constraints, and transaction costs. The explanations in the book are detailed enough to capture the interest of the curious student or researcher, and complete enough to give the necessary background material for further exploration into the subject and related literature.This book will be a useful tool for anyone interested in financial engineering, particularly algorithmic trading and commodity trading, and would like to understand the mathematically optimal strategies in different market environments.
Generalized Integral Transforms In Mathematical Finance
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Author : Andrey Itkin
language : en
Publisher: World Scientific
Release Date : 2021-10-12
Generalized Integral Transforms In Mathematical Finance written by Andrey Itkin and has been published by World Scientific this book supported file pdf, txt, epub, kindle and other format this book has been release on 2021-10-12 with Business & Economics categories.
This book describes several techniques, first invented in physics for solving problems of heat and mass transfer, and applies them to various problems of mathematical finance defined in domains with moving boundaries. These problems include: (a) semi-closed form pricing of options in the one-factor models with time-dependent barriers (Bachelier, Hull-White, CIR, CEV); (b) analyzing an interconnected banking system in the structural credit risk model with default contagion; (c) finding first hitting time density for a reducible diffusion process; (d) describing the exercise boundary of American options; (e) calculating default boundary for the structured default problem; (f) deriving a semi-closed form solution for optimal mean-reverting trading strategies; to mention but some.The main methods used in this book are generalized integral transforms and heat potentials. To find a semi-closed form solution, we need to solve a linear or nonlinear Volterra equation of the second kind and then represent the option price as a one-dimensional integral. Our analysis shows that these methods are computationally more efficient than the corresponding finite-difference methods for the backward or forward Kolmogorov PDEs (partial differential equations) while providing better accuracy and stability.We extend a large number of known results by either providing solutions on complementary or extended domains where the solution is not known yet or modifying these techniques and applying them to new types of equations, such as the Bessel process. The book contains several novel results broadly applicable in physics, mathematics, and engineering.
Pairs Trading
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Author : Ganapathy Vidyamurthy
language : en
Publisher: John Wiley & Sons
Release Date : 2011-02-02
Pairs Trading written by Ganapathy Vidyamurthy and has been published by John Wiley & Sons this book supported file pdf, txt, epub, kindle and other format this book has been release on 2011-02-02 with Business & Economics categories.
The first in-depth analysis of pairs trading Pairs trading is a market-neutral strategy in its most simple form. The strategy involves being long (or bullish) one asset and short (or bearish) another. If properly performed, the investor will gain if the market rises or falls. Pairs Trading reveals the secrets of this rigorous quantitative analysis program to provide individuals and investment houses with the tools they need to successfully implement and profit from this proven trading methodology. Pairs Trading contains specific and tested formulas for identifying and investing in pairs, and answers important questions such as what ratio should be used to construct the pairs properly. Ganapathy Vidyamurthy (Stamford, CT) is currently a quantitative software analyst and developer at a major New York City hedge fund.
Algorithmic And High Frequency Trading
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Author : Álvaro Cartea
language : en
Publisher: Cambridge University Press
Release Date : 2015-08-06
Algorithmic And High Frequency Trading written by Álvaro Cartea and has been published by Cambridge University Press this book supported file pdf, txt, epub, kindle and other format this book has been release on 2015-08-06 with Business & Economics categories.
A straightforward guide to the mathematics of algorithmic trading that reflects cutting-edge research.
Optimal Mean Reversion Strategy In The Presence Of Bid Ask Spread And Delays In Capital Allocations
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Author : Sergey Isaenko
language : en
Publisher:
Release Date : 2017
Optimal Mean Reversion Strategy In The Presence Of Bid Ask Spread And Delays In Capital Allocations written by Sergey Isaenko and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017 with categories.
A portfolio optimization problem for an investor who trades T-bills and a mean-reverting stock in the presence of proportional and convex transaction costs is considered. The proportional transaction cost represents a bid-ask spread, while the convex transaction cost is used to model delays in capital allocations. I utilize the historical bid-ask spread in US stock market and assume that the stock reverts on yearly basis, while an investor follows monthly changes in the stock price. It is found that proportional transaction cost has a relatively weak effect on the expected return and the Sharpe ratio of the investor's portfolio. Meantime, the presence of delays in capital allocations has a dramatic impact on the expected return and the Sharpe ratio of investor's portfolio.I also find the robust optimal strategy in the presence of model uncertainty and show that the latter increases the effective risk aversion of the investor and makes her view the stock as more risky.
Quantitative Trading
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Author : Ernie Chan
language : en
Publisher: Wiley
Release Date : 2008-11-17
Quantitative Trading written by Ernie Chan and has been published by Wiley this book supported file pdf, txt, epub, kindle and other format this book has been release on 2008-11-17 with Business & Economics categories.
While institutional traders continue to implement quantitative (or algorithmic) trading, many independent traders have wondered if they can still challenge powerful industry professionals at their own game? The answer is "yes," and in Quantitative Trading, Dr. Ernest Chan, a respected independent trader and consultant, will show you how. Whether you're an independent "retail" trader looking to start your own quantitative trading business or an individual who aspires to work as a quantitative trader at a major financial institution, this practical guide contains the information you need to succeed.