Optimal Portfolio Design for Statistical Arbitrage in Finance

Abstract: In this paper, the optimal mean-reverting portfolio (MRP) design problem is considered, which plays an important role for the statistical arbitrage (a.k.a. pairs trading) strategy in financial markets. The target of the optimal MRP design is to construct a portfolio from the underlying assets that can exhibit a satisfactory mean reversion property and a desirable variance property. A general problem formulation is proposed by considering these two targets and an investment leverage constraint. To solve this problem, a successive convex approximation method is used. The performance of the proposed model and algorithms are verified by numerical simulations.