Open AccessOptimal statistical arbitrage trading of Berkshire Hathaway stock and its replicating portfolio
Author(s) -
An-Sing Chen,
Che-Ming Yang
Publication year - 2021
Publication title -
plos one
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.99
H-Index - 332
ISSN - 1932-6203
DOI - 10.1371/journal.pone.0244541
Subject(s) - statistical arbitrage , index arbitrage , arbitrage , econometrics , risk arbitrage , arbitrage pricing theory , portfolio , financial economics , fixed income arbitrage , pairs trade , trading strategy , economics , stock (firearms) , algorithmic trading , capital asset pricing model , computer science , engineering , alternative trading system , mechanical engineering
In this paper, we make use of the replicating asset for statistical arbitrage trading, where the replicating asset is constructed by a portfolio that mimics the returns from a factor model. Using the replicating asset in the context of statistical arbitrage has never been done before in the literature. A novel optimal statistical arbitrage trading model is applied, and we derive the average transaction length and return for the Berkshire A stock and its replicating asset. The results show that the statistical arbitrage method proposed by Bertram (2010) is profitable by using the replicating asset. We also compute the average returns under different transaction costs. For the statistical arbitrage using the replicating asset of the factor model, average annual returns were at least 33%. Robustness is examined with the S&P500. Our results can provide hedge fund managers with a new technique for conducting statistical arbitrage.