Optimal Portfolio Management for Multiple Mean-Reverting Assets

Summary

This document studies how to manage positions across several mean-reverting assets, including whether an asset with no mean reversion can still belong in the portfolio. It formulates position management as an optimal control problem for an investor with power utility and reports a semi-explicit solution.

The solution is used to examine how parameter misspecification affects the optimal strategy and to derive properties of the resulting positions. The supplied text does not state the model's assumptions in detail, provide empirical tests, or report numerical performance, so it supports theoretical portfolio insights rather than a demonstrated trading result.

Key ideas

• Portfolio construction is studied for multiple assets with mean-reverting price dynamics.
• The position management objective uses power utility.
• The optimal control problem has a semi-explicit solution.
• The solution allows analysis of parameter misspecification and optimal portfolio properties.
• An asset without mean reversion may still merit consideration in a portfolio.

Tags

# Trading multiple mean reversion


# Trading multiple mean reversion









How should one construct a portfolio from multiple mean-reverting assets? Should one add an asset to portfolio even if the asset has zero mean reversion? We consider a position management problem for an agent trading multiple mean-reverting assets. We solve an optimal control problem for an agent with power utility, and present a semi-explicit solution. The nearly explicit nature of the solution allows us to study the effects of parameter mis-specification, and derive a number of properties of the optimal solution.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.