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1、JournalofEconomicDynamics&Control56(2015)1–19ContentslistsavailableatScienceDirectJournalofEconomicDynamics&Controljournalhomepage:www.elsevier.com/locate/jedcCostlyarbitragethroughpairstradingab,n,1YaotingLei,JingXuaDepartmentofMathematics,NationalUniversityofSingapore,BlockS17,10L
2、owerKentRidgeRoad,Singapore119076,Singaporeb3RiskManagementInstitute,NationalUniversityofSingapore,21HengMuiKengTerrace,IBuilding04-03,Singapore119613,SingaporearticleinfoabstractArticlehistory:WestudytheoptimaltradingpolicyofanarbitrageurwhocanexploittemporaryReceived20November2014
3、mispricinginamarketwithtwoconvergentassets.WebuildonthemodelofLiuandReceivedinrevisedformTimmermann(2013)andincludetransactioncosts,whichimposeadditionallimitstothe2March2015implementationofsuchconvergencetradestrategy.WeshowthatthepresenceofAccepted23April2015transactioncostscouldr
4、evealanendogenousstop-lossconcerninacertaineconomy,Availableonline1May2015whichaffectstheoptimalpolicyofthearbitrageurinsignificantways.Usingpairsofdual-JELclassification:listedChinesestocksharesassamplesandapairstradingstrategybasedonstandardC32deviationofthespreadasbenchmark,wedem
5、onstratetheefficiencyofthestrategyG11impliedbyourmodel.Severalextensionsofourmodelarealsodiscussed.G12&2015ElsevierB.V.Allrightsreserved.Keywords:PairstradingRiskyarbitrageDelta-neutralstrategiesTransactioncosts1.IntroductionPairstradingisaninvestmentstrategywhichhasbeenusedinthefin
6、ancialindustryfordecades.Anarbitrageurseeksinvestmentopportunitybyexploringtherelativemispricingbetweenassetswhichhavehistoricallyexhibitedautoregres-sivebehavior.Whenthespreaddivergesfromitsrecenthistory,thearbitrageurtakesalongpositionintheundervaluedassetandfinancesthispositionby
7、takingashortpositionintheovervaluedone.Ifthemarketmovestoarationalequilibriumandthespreadconvergesinthefuture,thearbitrageurcanclosebothpositionstogenerateaprofit.Besidesitspopularityinthefinancialindustry,pairstradinghasdrawnconsiderableacademicattention.Gatevetal.(2006)investigate
8、theempiricalperform
