We study an optimal pairs trading model with costly short-selling. When the investor has logarithm utility function, we derive the solution in closed form, which shows that: the optimal allocation functions are piece-wise linear in the pair's relative price; stock borrowing fees asymmetrically red...
Xu (2015) Costly arbitrage through pairs trading, Journal of Economic Dynamics and Control 56, 1-19.Costly arbitrage through pairs trading[J] . Yaoting Lei,Jing Xu.Journal of Economic Dynamics and Control . 2015Yaoting Lei and Jing Xu. Costly arbitrage through pairs trading. Journal of ...
Arbitrage AsymmetryPairs tradingLimits of arbitrageThis paper explains the idiosyncratic risk puzzle in a novel test setting with a combination of arbitrage risk and arbitrage asymmetry as in Stambaugh/Yu/Yuan (doi:10.2139/ssrn.2833800Stephanie Sarah Riedinger...