Shi-Jie Deng

This paper proposes to model the spreads associated with financial asset prices by fractional Ornstein – Uhlenbeck (fOU) processes and constructs a pairs trading strategy based on the fOU spread model. It is shown that the Hurst parameter of the fOU process contains substantial information about the anti-persistence, or mean-reversion, characteristic of the spread over time. Consequently, the Hurst parameter is a key measure of mean-reversion for selecting the preferred candidates to trade. Adaptive methods for setting the optimal trading thresholds are proposed as well. The enhanced performance of the proposed trading model is demonstrated by comparison with existing models through simulation studies as well as an empirical analysis using high-frequency Chinese equity market data.

In this analysis of the risk and return of stocks in global and Chinese markets, we build a reasonably large number of models for stock selection and create optimized portfolios to outperform a global benchmark. We apply robust regression techniques in producing stock-selection models and Markowitz-based optimization techniques in portfolio construction in a global stock universe and two Chinese stock universes. We report the results of applying a data mining corrections test to the global and Chinese stock universes. We find that (1) robust regression applications are appropriate for modeling stock returns in global and Chinese stock markets; (2) mean-variance techniques continue to produce portfolios capable of generating returns that exceed transactions costs; and (3) our global portfolio selection models pass data mining tests, such that the models produce statistically significant asset selection for global and MSCI-China universes, but not for China A-shares.

In this paper, we establish a fluid limit for a two-sided Markov order book model. The main result states that in a certain asymptotic regime, a pair of measure-valued processes representing the “sell-side shape” and “buy-side shape” of an order book converges to a pair of deterministic measure-valued processes in a certain sense. We also test the fluid approximation on data. The empirical results suggest that the approximation is reasonably good for liquidly traded stocks in certain time periods.

In this paper, we establish a fluid limit for a two--sided Markov order book model. Our main result states that in a certain asymptotic regime, a pair of measure-valued processes representing the "sell-side shape" and "buy-side shape" of an order book converges to a pair of deterministic measure-valued processes in a certain sense. We also test our fluid approximation on data. The empirical results suggest that the approximation is reasonably good for liquidly--traded stocks in certain time periods.