An Application of the Ornstein-Uhlenbeck Process to Pairs Trading
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arXiv
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| Main Authors: | , , , , |
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| Format: | Preprint |
| Published: |
2024
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| _version_ | 1866912159269650432 |
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| author | Suchato, Jirat Wiryadi, Sean Chen, Danran Zhao, Ava Yue, Michael |
| author_facet | Suchato, Jirat Wiryadi, Sean Chen, Danran Zhao, Ava Yue, Michael |
| contents | We conduct a preliminary analysis of a pairs trading strategy using the Ornstein-Uhlenbeck (OU) process to model stock price spreads. We compare this approach to a naive pairs trading strategy that uses a rolling window to calculate mean and standard deviation parameters. Our findings suggest that the OU model captures signals and trends effectively but underperforms the naive model on a risk-return basis, likely due to non-stationary pairs and parameter tuning limitations. |
| format | Preprint |
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arxiv_https___arxiv_org_abs_2412_12458 |
| institution | arXiv |
| publishDate | 2024 |
| record_format | arxiv |
| spellingShingle | An Application of the Ornstein-Uhlenbeck Process to Pairs Trading Suchato, Jirat Wiryadi, Sean Chen, Danran Zhao, Ava Yue, Michael Trading and Market Microstructure We conduct a preliminary analysis of a pairs trading strategy using the Ornstein-Uhlenbeck (OU) process to model stock price spreads. We compare this approach to a naive pairs trading strategy that uses a rolling window to calculate mean and standard deviation parameters. Our findings suggest that the OU model captures signals and trends effectively but underperforms the naive model on a risk-return basis, likely due to non-stationary pairs and parameter tuning limitations. |
| title | An Application of the Ornstein-Uhlenbeck Process to Pairs Trading |
| topic | Trading and Market Microstructure |
| url | https://arxiv.org/abs/2412.12458 |