Management Review

›› 2019, Vol. 31 ›› Issue (6): 23-35.

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Study of Dynamic Management Strategy of Fund's Paired Assets Based on the O-U Process

Fu Yi1, Zhang Jizhou1, Guo Rennan2   

  1. 1. School of Finance and Business, Shanghai Normal University, Shanghai 200234;
    2. Mathematics and Science College, Shanghai Normal University, Shanghai 200234
  • Received:2016-12-27 Online:2019-06-28 Published:2019-07-08

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Abstract:

As a market neutral strategy, pairs trading has been widely accepted by investors. In this paper, the spreads of risk assets are assumed to be Ornstein-Uhlenbeck (O-U) process, and the portfolio of the fund is assumed to be composed by multiple paired assets. Based on the maximization of the wealth utility at the maturity, we establish a dynamic management strategy model for the high-dimensional paired assets. In order to solve the model, we use the Dynamic Programming Principle to derive the corresponding equation. After separating variables, we get an explicit solution of the equation, i.e., maximum wealth utility and the optimal management strategy are obtained. Finally, to verify the result, the strategies of paired assets in domestic securities market are simulated, and the effectiveness and robustness of the strategy are also further analyzed.

Key words: pairs trading, asset management, stochastic control, HJB equation