Cointegration, Statistical Arbitrage and Insurer's Investment Decision


    Department of Systems Engineering and Engineering Management

            The Chinese University of Hong Kong


Title     : Cointegration, Statistical Arbitrage and Insurer's Investment Decision

Speaker    : Prof. Hoi Ying Wong

Date       :May 3nd, 2013 (Friday)

Time       : 4:30 p.m. - 5:30 p.m.

Venue      : Room 513

             William M.W. Mong Engineering Building




Cointegration is a useful econometric tool for identifying assets which share a common equilibrium. The importance of cointegration has become recognized and resulted in a Nobel Prize in Economics for Granger in 2003. This talk begins with the concept of cointegration in time series analysis and the corresponding continuous-time cointegration models. We show using the time-consistent mean-variance portfolio approach that the existence of cointegration implies the existence of a statistical arbitrage opportunity. Statistical arbitrage is attractive to traders. However, we concern with the implication of cointegration based arbitrage to insurers (insurance companies) whose major social responsibility is to manage pure risks instead of making additional profit by participating in trading activity. Hence, they are supposed to be more risk-averse than traders. By considering the constant relative risk aversion utility function, we find that highly risk-averse insurers are not interested in cointegration based arbitrage. Alternatively, an extremely risky insurer with a utility function close to the expected profit is eager to search for statistical arbitrage opportunities but such an insurer has minimal sensitivity to large insurance claims. Thus, our theory implies that it is necessary to regulate insurers to ensure a high level of risk aversion within the insurance industry.

(The talk is based on joint papers with M.C. Chiu)


Hoi Ying Wong is an associate professor in the Department of Statistics at the Chinese University of Hong Kong. His research interest is in applications of mathematics and statistics to finance and risk management problems. He has published papers in academic journals in applied mathematics, statistics and finance, such as SIAM Journal on Numerical Analysis, European Journal of Operational Research, Journal of Banking & Finance, Journal of Empirical Finance, Mathematical Finance, Quantitative Finance, and Computational Statistics & Data Analysis, among others. He is on the editorial board of International Journal of Theoretical & Applied Finance. He has consulting experience with Hong Kong Monetary Authority, hedge funds and commercial banks in Hong Kong.

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               Department of Systems Engineering and Engineering Management


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Friday, May 3, 2013 - 08:30 to 09:30