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
Entropy 2017, 19(7), 320; https://doi.org/10.3390/e19070320
Received: 29 April 2017
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Revised: 20 June 2017
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Accepted: 27 June 2017
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Published: 30 June 2017
(This article belongs to the Special Issue Entropic Applications in Economics and Finance)
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.
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Keywords:
pair trading; model uncertainty; model risk; optimal stopping
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MDPI and ACS Style
Yoshikawa, D. An Entropic Approach for Pair Trading. Entropy 2017, 19, 320. https://doi.org/10.3390/e19070320
AMA Style
Yoshikawa D. An Entropic Approach for Pair Trading. Entropy. 2017; 19(7):320. https://doi.org/10.3390/e19070320
Chicago/Turabian StyleYoshikawa, Daisuke. 2017. "An Entropic Approach for Pair Trading" Entropy 19, no. 7: 320. https://doi.org/10.3390/e19070320
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