Speaker: Professor Qing Zhang (University of Georgia)
Hosted by: University of Liverpool Management School's Operations and Supply Chain Management Group
Open to: Management School PhD students and academic staff, with no sign up needed
Date: Thursday 9 May 2024
Time: 11am-2pm
Online: join Zoom meeting here
- Meeting ID: 999 2524 6854
- Passcode: QEd#PGc1
Place: ERB-LHT
Abstract
This presentation discusses an optimal strategy for trading a pair of stocks simultaneously. The concept of pairs trading involves monitoring the price movements of two stocks and comparing their relative strengths over time.
A pairs trade is initiated when there is a divergence in their prices, leading to a short position on the stronger stock and a long position on the weaker one. This strategy relies on anticipating a reversal in their price strengths.
Traditionally, pairs trading models are based on the assumption that the difference in stock prices follows a mean reversion equation.
In this presentation, we explore the optimal pairs-trading problem by allowing the stock prices to follow general geometric Brownian motions. The goal is to trade the pairs over time to maximize overall returns while considering a fixed commission cost for each transaction.
The optimal trading policy is defined by threshold curves derived from solving the associated Hamilton-Jacobi-Bellman (HJB) equations. We will also present numerical examples to demonstrate how our trading rules depend on various parameters and to show how to implement these results in real-world trading scenarios.
Speaker
Qing Zhang is Professor of Mathematics at the University of Georgia. He received his Ph.D. in Applied Mathematics from Brown University. He specializes in stochastic systems and control, filtering, and applications in finance.
He has published five monographs on two-time scale Markovian systems and applications and over 200 research papers including top journals such as Automatica, Mathematics of Operations Research, IEEE Transactions on Automatic control, and SIAM Journal on Control and Optimization.
He co-edited five books and was Associate Editor of Automatica, IEEE Transactions on Automatic control, and SIAM Journal on Control and Optimization. He is currently Corresponding Editor of SIAM Journal on Control and Optimization.
He also served on a number of international conference organizing committees including Co-Chair of the organizing committee for the SIAM Conference on Control and Applications in 2017.
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