%0 Journal Article
%T Optimal switching for pairs trading rule: a viscosity solutions approach
%A Minh Man Ngo
%A Huyen Pham
%J Quantitative Finance
%D 2014
%I arXiv
%X This paper studies the problem of determining the optimal cut-off for pairs trading rules. We consider two correlated assets whose spread is modelled by a mean-reverting process with stochastic volatility, and the optimal pair trading rule is formulated as an optimal switching problem between three regimes: flat position (no holding stocks), long one short the other and short one long the other. A fixed commission cost is charged with each transaction. We use a viscosity solutions approach to prove the existence and the explicit characterization of cut-off points via the resolution of quasi-algebraic equations. We illustrate our results by numerical simulations.
%U http://arxiv.org/abs/1412.7649v1