Optimal Convergence Trading with Unobservable Pricing Errors

@article{Altay2018OptimalCT,
  title={Optimal Convergence Trading with Unobservable Pricing Errors},
  author={S{\"u}han Altay and Katia Colaneri and Zehra Eksi},
  journal={ERN: Other Microeconomics: Decision-Making under Risk \& Uncertainty (Topic)},
  year={2018}
}
We study a dynamic portfolio optimization problem related to convergence trading, which is an investment strategy that exploits temporary mispricing by simultaneously buying relatively underpriced assets and selling short relatively overpriced ones with the expectation that their prices converge in the future. We build on the model of Liu and Timmermann (2013) and extend it by incorporating unobservable Markov-modulated pricing errors into the price dynamics of two co-integrated assets. We… Expand
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