Department of Economics and Business Economics

Optimal convergence trade strategies

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Optimal convergence trade strategies. / Liu, J.; Timmermann, A.

In: Review of Financial Studies, Vol. 26, No. 4, 01.04.2013, p. 1048-1086.

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaperJournal articleResearchpeer-review

Harvard

Liu, J & Timmermann, A 2013, 'Optimal convergence trade strategies', Review of Financial Studies, vol. 26, no. 4, pp. 1048-1086. https://doi.org/10.1093/rfs/hhs130

APA

Liu, J., & Timmermann, A. (2013). Optimal convergence trade strategies. Review of Financial Studies, 26(4), 1048-1086. https://doi.org/10.1093/rfs/hhs130

CBE

Liu J, Timmermann A. 2013. Optimal convergence trade strategies. Review of Financial Studies. 26(4):1048-1086. https://doi.org/10.1093/rfs/hhs130

MLA

Liu, J. and A. Timmermann. "Optimal convergence trade strategies". Review of Financial Studies. 2013, 26(4). 1048-1086. https://doi.org/10.1093/rfs/hhs130

Vancouver

Liu J, Timmermann A. Optimal convergence trade strategies. Review of Financial Studies. 2013 Apr 1;26(4):1048-1086. https://doi.org/10.1093/rfs/hhs130

Author

Liu, J. ; Timmermann, A. / Optimal convergence trade strategies. In: Review of Financial Studies. 2013 ; Vol. 26, No. 4. pp. 1048-1086.

Bibtex

@article{576d3261d8f74def95961b7b8274e80c,
title = "Optimal convergence trade strategies",
abstract = "Convergence trades exploit temporary mispricing by simultaneously buying relatively underpriced assets and selling short relatively overpriced assets. This paper studies optimal convergence trades under both recurring and nonrecurring arbitrage opportunities represented by continuing and {"}stopped{"} cointegrated price processes and considers both fixed and stochastic (Poisson) horizons. Conventional long-short delta neutral strategies are generally suboptimal and it can be optimal to simultaneously go long (or short) in two mispriced assets. Optimal portfolio holdings critically depend on whether the risky asset position is liquidated when prices converge. Our theoretical results are illustrated on pairs of Chinese bank shares traded on both the Hong Kong and China stock exchanges.",
author = "J. Liu and A. Timmermann",
year = "2013",
month = apr,
day = "1",
doi = "10.1093/rfs/hhs130",
language = "English",
volume = "26",
pages = "1048--1086",
journal = "Review of Financial Studies",
issn = "0893-9454",
publisher = "Oxford University Press",
number = "4",

}

RIS

TY - JOUR

T1 - Optimal convergence trade strategies

AU - Liu, J.

AU - Timmermann, A.

PY - 2013/4/1

Y1 - 2013/4/1

N2 - Convergence trades exploit temporary mispricing by simultaneously buying relatively underpriced assets and selling short relatively overpriced assets. This paper studies optimal convergence trades under both recurring and nonrecurring arbitrage opportunities represented by continuing and "stopped" cointegrated price processes and considers both fixed and stochastic (Poisson) horizons. Conventional long-short delta neutral strategies are generally suboptimal and it can be optimal to simultaneously go long (or short) in two mispriced assets. Optimal portfolio holdings critically depend on whether the risky asset position is liquidated when prices converge. Our theoretical results are illustrated on pairs of Chinese bank shares traded on both the Hong Kong and China stock exchanges.

AB - Convergence trades exploit temporary mispricing by simultaneously buying relatively underpriced assets and selling short relatively overpriced assets. This paper studies optimal convergence trades under both recurring and nonrecurring arbitrage opportunities represented by continuing and "stopped" cointegrated price processes and considers both fixed and stochastic (Poisson) horizons. Conventional long-short delta neutral strategies are generally suboptimal and it can be optimal to simultaneously go long (or short) in two mispriced assets. Optimal portfolio holdings critically depend on whether the risky asset position is liquidated when prices converge. Our theoretical results are illustrated on pairs of Chinese bank shares traded on both the Hong Kong and China stock exchanges.

UR - http://www.scopus.com/inward/record.url?scp=84875198466&partnerID=8YFLogxK

U2 - 10.1093/rfs/hhs130

DO - 10.1093/rfs/hhs130

M3 - Journal article

AN - SCOPUS:84875198466

VL - 26

SP - 1048

EP - 1086

JO - Review of Financial Studies

JF - Review of Financial Studies

SN - 0893-9454

IS - 4

ER -