Mean-Reverting Portfolio With Budget Constraint

This paper considers the mean-reverting portfolio (MRP) design problem arising from statistical arbitrage (a.k.a. pairs trading) in the financial markets. It aims at designing a portfolio of underlying assets by optimizing the mean reversion strength of the portfolio, while taking into consideration the portfolio variance and an investment budget constraint. Several specific design problems are considered based on different mean reversion criteria. Efficient algorithms are proposed to solve the problems. Numerical results on both synthetic and market data show that the proposed MRP design methods can generate consistent profits and outperform the traditional design methods and the benchmark methods in the literature.