Optimal multiple pairs trading strategy using derivative free optimization under actual investment management conditions

Research output: Contribution to journalArticle

Abstract

Pairs trading strategy has a history of at least 30 years in the stock market and is one of the most common trading strategies used today due to its understandability. Recently, Yamamoto and Hibiki [13] studied optimal pairs trading strategy using a new approach under actual fund management conditions, such as transaction costs, discrete rebalance intervals, finite investment horizons and so on. However, this approach cannot solve the problem of multiple pairs because this problem is formulated as a large scale simulation based non-continuous optimization problem. In this research, we formulate a model to solve an optimal pairs trading strategy problem using multiple pairs under actual fund management conditions. Furthermore, we propose a heuristic algorithm based on a derivative free optimization (DFO) method for solving this problem efficiently.

Original languageEnglish
Pages (from-to)244-261
Number of pages18
JournalJournal of the Operations Research Society of Japan
Volume60
Issue number3
Publication statusPublished - 2017 Jul 1

Keywords

  • Derivative free optimization
  • Finance
  • Fund management conditions
  • Multiple pairs
  • Pairs trading strategy

ASJC Scopus subject areas

  • Decision Sciences(all)
  • Management Science and Operations Research

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