High-dimensional statistical arbitrage with factor models and stochastic control

DOI10.1080/1350486X.2019.1702067zbMATH Open1430.91095arXiv1901.09309OpenAlexW2995185413MaRDI QIDQ5207795FDOQ5207795

Authors: Jorge Guijarro-Ordóñez 

Publication date: 13 January 2020

Published in: Applied Mathematical Finance (Search for Journal in Brave)

Abstract: The present paper provides a study of high-dimensional statistical arbitrage that combines factor models with the tools from stochastic control, obtaining closed-form optimal strategies which are both interpretable and computationally implementable in a high-dimensional setting. Our setup is based on a general statistically-constructed factor model with mean-reverting residuals, in which we show how to construct analytically market-neutral portfolios and we analyze the problem of investing optimally in continuous time and finite horizon under exponential and mean-variance utilities. We also extend our model to incorporate constraints on the investor's portfolio like dollar-neutrality and market frictions in the form of temporary quadratic transaction costs, provide extensive Monte Carlo simulations of the previous strategies with 100 assets, and describe further possible extensions of our work.

Full work available at URL: https://arxiv.org/abs/1901.09309

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zbMATH Keywords

factor modelsOrnstein-Uhlenbeck processstochastic controlmean reversionalgorithmic tradingstatistical arbitrage

Mathematics Subject Classification ID

Diffusion processes (60J60) Portfolio theory (91G10) Financial markets (91G15) Optimal stochastic control (93E20)

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Cited In (10)

• Detecting data-driven robust statistical arbitrage strategies with deep neural networks
• Robust statistical arbitrage strategies
• Statistical arbitrage with optimal causal paths on high-frequency data of the S&P 500
• Statistical arbitrage in the US equities market
• Statistical arbitrage in the Black-Scholes framework
• Statistical arbitrage: factor investing approach
• Risk control of mean-reversion time in statistical arbitrage
• Optimal dynamic futures portfolio under a multifactor Gaussian framework
• Cryptoasset factor models
• Statistical arbitrage under a fractal price model

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