The role of cointegration is analysed for optimal hedging of an h-period portfolio. Prices are assumed to be generated by a cointegrated vector autoregressive model allowing for stationary martingale errors, satisfying a mixing condition and hence some heteroscedasticity. The risk of a portfolio...

In this paper we consider two cases of pairs trading strategies: a conditional statistical arbitrage method and an implicit statistical arbitrage method. We use a simulation-based Bayesian procedure for predicting stable ratios, defined in a cointegration model, of pairs of stock prices. We show...

A novel simulation-based methodology is proposed to test the validity of a set of marginal time series models, where the dependence structure between the time series is taken "directly" from the observed data. The procedure is useful when one wants to summarize the test results for several time...