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)
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-TextKeywords:
pair trading; model uncertainty; model risk; optimal stopping
▼
Figures
Figure 1
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).
Share & Cite This Article
MDPI and ACS Style
Yoshikawa, D. An Entropic Approach for Pair Trading. Entropy 2017, 19, 320.
Note that from the first issue of 2016, MDPI journals use article numbers instead of page numbers. See further details here.