Statistical Arbitrage Strategy in Multi-Asset Market Using Time Series Analysis

Takahiro Imai,Kei Nakagawa

doi:10.4236/jmf.2020.102020

Abstract

The statistical arbitrage strategy is one of the most traditional investment strategies. There are many theoretical and empirical studies until now. However, almost all of the statistical arbitrage strategies focus on the price difference (spread) between two similar assets in the same asset class and exploit the mean reversion of spreads, i.e. pairs trading. In this study, we extend the strategy to multiple assets in the multi-asset market. Although mean-reverting portfolios were derived based on a single criterion in related researches, we derive a mean-reverting portfolio by optimizing multiple mean-reversion criteria. We expect that a mean-reverting portfolio based on multiple indicators leads to a higher return/risk. We perform an empirical analysis in multi-asset market and show the profitability of our strategy.

Highlights

Portfolio selection is one of the most important topics in mathematical finance
By using the technique of a multi-objective optimization problem called Polynomial Goal Programming (PGP), we propose a fair approach to combine the quantitative criteria of the mean reversion
We introduce multiple indicators which show the goodness in terms of the mean reversion of the portfolio zt

Summary

Introduction

Portfolio selection is one of the most important topics in mathematical finance. Modern portfolio theory has its genesis in the seminal works of Markowitz [1]. In Markowitz analysis, the investment return should be maximized for a given level of risk. The main problem of portfolio selection is how to derive a portfolio with a higher return/risk. Several researchers have been built some models to maximize return/risk of the portfolio. There are many studies based on methods such as machine learning [2] and uncertainty theory [3] in recent years. In addition to maximizing return/risk, there have been proposed methods for constructing portfolios based on various criteria. Risk-based portfolio that focuses only on risk such as risk parity [4], factor risk parity [5]

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