New research reveals key to successful portfolio management in volatile markets.
The article explores how to make the most money from assets that move together in the stock market. The researchers look at different trading strategies and find that the best ones are not always neutral to market changes. They focus on pairs trading with two related stocks and show that the investment problem is well-posed only under certain conditions. These conditions are strict and ensure that the optimal strategy is market-neutral. The researchers also extend their findings to multiple assets and different investor preferences. In the end, they develop a model for spread trading with futures assets and transaction costs.