Application of Black-Litterman Bayesian in Statistical Arbitrage

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Bibliographic Details
Main Author:	Zhou, Qiqin
Format:	Preprint
Published:	2024
Subjects:	Computational Finance Applications
Online Access:	Acceder al recurso
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author	Zhou, Qiqin
author_facet	Zhou, Qiqin
contents	\begin{abstract} In this paper, we integrated the statistical arbitrage strategy, pairs trading, into the Black-Litterman model and constructed efficient mean-variance portfolios. Typically, pairs trading underperforms under volatile or distressed market condition because the selected asset pairs fail to revert to equilibrium within the investment horizon. By enhancing this strategy with the Black-Litterman portfolio optimization, we achieved superior performance compared to the S\&P 500 market index under both normal and extreme market conditions. Furthermore, this research presents an innovative idea of incorporating traditional pairs trading strategies into the portfolio optimization framework in a scalable and systematic manner.
format	Preprint
id	arxiv_https___arxiv_org_abs_2406_06706
institution	arXiv
publishDate	2024
record_format	arxiv
spellingShingle	Application of Black-Litterman Bayesian in Statistical Arbitrage Zhou, Qiqin Computational Finance Applications \begin{abstract} In this paper, we integrated the statistical arbitrage strategy, pairs trading, into the Black-Litterman model and constructed efficient mean-variance portfolios. Typically, pairs trading underperforms under volatile or distressed market condition because the selected asset pairs fail to revert to equilibrium within the investment horizon. By enhancing this strategy with the Black-Litterman portfolio optimization, we achieved superior performance compared to the S\&P 500 market index under both normal and extreme market conditions. Furthermore, this research presents an innovative idea of incorporating traditional pairs trading strategies into the portfolio optimization framework in a scalable and systematic manner.
title	Application of Black-Litterman Bayesian in Statistical Arbitrage
topic	Computational Finance Applications
url	https://arxiv.org/abs/2406.06706

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