2024/06/10 by Qiqin Zhou, Zhou, Qiqin · 1 citation
Computer Science · #Applications (stat.AP) #Bayesian Methods and Mixture Models #Computational Finance (q-fin.CP) #FOS: Computer and information sciences #FOS: Economics and business
paper · pdf · doi:10.48550/arxiv.2406.06706
openalex publication_date 2024/06/10 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
\beginabstract In this paper, we integrated the statistical arbitrage strategy, pairs trading, into the Black-Litterman model and constructed efficient mean-variance portfolios. Typically, pairs trading underperforms under volatile or distressed market condition because the selected asset pairs fail to revert to equilibrium within the investment horizon. By enhancing this strategy with the Black-Litterman portfolio optimization, we achieved superior performance compared to the S&P 500 market index under both normal and extreme market conditions. Furthermore, this research presents an innovative idea of incorporating traditional pairs trading strategies into the portfolio optimization framework in a scalable and systematic manner.