Trading Cointegrated Assets with Price Impact

Alvaro Cartea, Luhui Gan and Sebastian Jaimungal

Abstract: Executing a basket of co-integrated assets is an important task facing investors. Here, we show how to do this accounting for the informational advantage gained from assets within and outside the basket, as well as for the permanent price impact of market orders (MOs) from all market participants, and the temporary impact that the agent's MOs have on prices. The execution problem is posed as an optimal stochastic control problem and we demonstrate that, under some mild conditions, the value function admits a closed-form solution, and prove a verification theorem. Furthermore, we use data of five stocks traded in the Nasdaq exchange to estimate the model parameters and use simulations to illustrate the performance of the strategy. As an example, the agent liquidates a portfolio consisting of shares in Intel Corporation (INTC) and Market Vectors Semiconductor ETF (SMH). We show that including the information provided by three additional assets, FARO Technologies (FARO), NetApp (NTAP) and Oracle Corporation (ORCL), considerably improves the strategy's performance; for the portfolio we execute, it outperforms the multi-asset version of Almgren-Chriss by approximately 4 to 4.5 basis points.

Date: 2018-07
New Economics Papers: this item is included in nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Published in Mathematical Finance, Forthcoming 2018

Downloads: (external link)
http://arxiv.org/pdf/1807.01428 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1807.01428

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().