How is the optimal OU threshold derived analytically?

For an OU process with mean reversion kappa and vol sigma, the optimal entry threshold a* = sigma/sqrt(2*kappa) maximizes expected return per unit time assuming zero transaction costs. With costs, the threshold shifts outward.

How does transaction cost affect optimal thresholds?

Higher transaction costs require wider entry thresholds (enter only when spread is very extreme) to compensate for the cost of the round trip. Narrow spreads with high costs can make a strategy unprofitable.

Statistical Arbitrage Entry/Exit Threshold Optimizer

Optimize entry and exit thresholds for a mean-reverting spread to maximize risk-adjusted return. Use the formula for optimal stopping of OU process or grid search over threshold combinations.

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Frequently Asked Questions

How is the optimal OU threshold derived analytically?

How does transaction cost affect optimal thresholds?