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Entropy 2017, 19(7), 320; https://doi.org/10.3390/e19070320

An Entropic Approach for Pair Trading

Department of Business Administration, Hokkai-Gakuen University, 4-1-40 Asahimachi, Toyohira-ku, Sapporo 062-8605, Japan
Academic Editors: Stelios Bekiros and Michael (Mike) Stutzer
Received: 29 April 2017 / Revised: 20 June 2017 / Accepted: 27 June 2017 / Published: 30 June 2017
(This article belongs to the Special Issue Entropic Applications in Economics and Finance)
View Full-Text   |   Download PDF [430 KB, uploaded 30 June 2017]   |  

Abstract

In this paper, we derive the optimal boundary for pair trading. This boundary defines the points of entry into or exit from the market for a given stock pair. However, if the assumed model contains uncertainty, the resulting boundary could result in large losses. To avoid this, we develop a more robust strategy by accounting for the model uncertainty. To incorporate the model uncertainty, we use the relative entropy as a penalty function in the expected profit from pair trading. View Full-Text
Keywords: pair trading; model uncertainty; model risk; optimal stopping pair trading; model uncertainty; model risk; optimal stopping
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).
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Yoshikawa, D. An Entropic Approach for Pair Trading. Entropy 2017, 19, 320.

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