Pairs trading with stock borrowing fee
File(s)
Accepted version
Author(s)
Chen, Ziyi
Gu, Jia-Wen
Zheng, Harry
Type
Journal Article
Abstract
Pairs trading is a strategy that involves simultaneously longing one asset and shorting another related asset, aiming to profit from the price difference between them. In this paper, we discuss a pairs trading problem with stock borrowing fee under a mean-variance (MV) framework. We assume that the difference in the logarithm of two stock prices follows an OU process and focus on the trading strategy that always shorts one stock and longs the other in equal dollar amount. When borrowing stocks for short selling, an interest fee is incurred. By combining dynamic programming and BSDE methods, we establish the existence of solutions to the BSDE and, based on this result, derive a semi-closed-form equilibrium strategy that can be decomposed into three parts: the first part reflects myopic demand, which is expressed as a linear function of the price spread. The second part, characterized by the solution of a BSDE, represents hedging demand. The third part arises from the stock borrowing fee. We also consider the impact of trading constraints on the equilibrium strategy. Finally, we adopt a deep learning-based approach to numerically solve the problem and present simulation results to show the performance of the equilibrium strategy.
Date Issued
2026-01-06
Date Acceptance
2025-11-23
Citation
Quantitative Finance, 2026, 26 (2), pp.255-271
ISSN
1469-7688
Publisher
Informa UK Limited
Start Page
255
End Page
271
Journal / Book Title
Quantitative Finance
Volume
26
Issue
2
Copyright Statement
Copyright © 2026 Informa UK Limited, trading as Taylor & Francis Group. This is the author’s accepted manuscript made available under a CC-BY licence in accordance with Imperial’s Research Publications Open Access policy (www.imperial.ac.uk/oa-policy)
License URL
Publication Status
Published
Date Publish Online
2026-01-06