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Entropy 2017, 19(7), 320;

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)
Full-Text   |   PDF [430 KB, uploaded 30 June 2017]   |  


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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Yoshikawa, D. An Entropic Approach for Pair Trading. Entropy 2017, 19, 320.

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