Pairs Trading

This m-file will show you the dynamic pairs trading using the stochastic control approach.

This function will help you to get the the instantaneous number of shares held respectively in stock one S1 and stock two S2. The dynamic of S1 and S2 will be implemented by the Monte Carlo simulation using Euler-Maruyama scheme. And there is an instantaneous co-integrating vector z(t) to link these two SDEs. You can use it to get the dynamic control pair and compare the terminal wealth with the one under the constant control pair.