Optimal Mean Reversion Trading

Mathematical Analysis and Practical Applications

Optimal Mean Reversion Trading: Mathematical Analysis and Practical Applications provides a systematic study to the practical problem of optimal trading in the presence of mean-reverting price dynamics. It is self-contained and organized in its presentation, and provides rigorous mathematical analysis as well as computational methods for trading ETFs, options, futures on commodities or volatility indices, and credit risk derivatives.

This book offers a unique financial engineering approach that combines novel analytical methodologies and applications to a wide array of real-world examples. It extracts the mathematical problems from various trading approaches and scenarios, but also addresses the practical aspects of trading problems, such as model estimation, risk premium, risk constraints, and transaction costs. The explanations in the book are detailed enough to capture the interest of the curious student or researcher, and complete enough to give the necessary background material for further exploration into the subject and related literature.

This book will be a useful tool for anyone interested in financial engineering, particularly algorithmic trading and commodity trading, and would like to understand the mathematically optimal strategies in different market environments.

Contents:

• Introduction
• Trading Under Ornstein–Uhlenbeck Model
• Trading Under the Exponential OU Model
• Trading Under CIR Model
• Futures Under Mean Reversion
• Options Liquidation of Options
• Trading Credit Derivatives

Readership: Doctoral and master's students, advanced undergraduates, practitioners, and researchers in financial engineering, with a particular interest or specialization in algorithmic trading (especially pairs trading) and ETFs, futures, commodities, volatility derivatives and credit risk.
Key Features:

• Contains both an analysis of trading strategies and methods and means of practical implementation
• Approaches the topic using a balanced approach of rigorous analysis and real-world examples taken from a variety of market sectors such as fixed income funds, commodities, index/volatility futures, and options
• Includes detailed analysis of ETF-based pairs trading strategies, and other mean reversion strategies
• Explains issues involved in the day-to-day life of traders, going beyond the mathematics of trading
• Provides mathematical justification and quantitative enhancement for certain intuitive trading strategies that can be used by practitioners