Optimal closing of a pair trade with a model containing jumps
Preprint, 2010

A pair trade is a portfolio consisting of a long position in one asset and a short position in another, and it is a widely applied investment strategy in the financial industry. Recently, Ekström, Lindberg and Tysk studied the problem of optimally closing a pair trading strategy when the difference of the two assets is modelled by an Ornstein-Uhlenbeck process. In this paper we study the same problem, but the model is generalized to also include jumps. More precisely we assume that the above difference is an Ornstein-Uhlenbeck type process, driven by a Lévy process of finite activity. We prove a verification theorem and analyze a numerical method for the associated free boundary problem. We prove rigorous error estimates, which are used to draw some conclusions from numerical simulations.


Stig Larsson

University of Gothenburg

Chalmers, Mathematical Sciences, Mathematics


University of Gothenburg

Chalmers, Mathematical Sciences, Mathematical Statistics

Marcus M J Warfheimer

Chalmers, Mathematical Sciences, Mathematics

University of Gothenburg

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Other Mathematics

Preprint - Department of Mathematical Sciences, Chalmers University of Technology and Göteborg University: 2010:22

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