Kei Nakagawa

Fund Manager, Equity Investment Group, Sumitomo Mitsui Asset Management
Tokyo, Japan

Profile

Kei NAKAGAWA is a quantitative investment strategy fund manager at the equity investment group of Sumitomo Mitsui Asset Management Co Ltd. He started his career in 2012 at Nissay Asset Management Corporation. Within three years at Nissay, he was in charge of risk management and quantitative equity investment strategy. In 2014, he joined Sumitomo Mitsui Asset Management Co Ltd as a fund manager specializing in quantitative strategies. He received his BA in economics from Kyoto University in 2012 and MBA from Tsukuba University in 2015. He presented his research entitled "Model Predictive Control Strategy for Co-integrated Pairs of Stocks" at the annual meeting of the Nippon Finance Association (NFA) in June 2015.


Presentation Abstract

Model Predictive Control Strategy for Co-integrated Pairs of Stocks

It is usually said that means and variances of stock market prices are unpredictable. On the contrary, the spread processes of co-integrated pairs of stocks have constant means and variances due to their stationarity. It is therefore reasonable to say that co-integrated pairs trading fits comfortably within the Portfolio Theory.

In my presentation, I construct an optimal portfolio with multiple spreads that are tradable by buying one stock and selling the other. The multiple spreads in the portfolio lead to diversification benefits.
In practice, the Mean-Variance approach is employed in the process of portfolio construction. In addition, I also employ the Model Predictive Control (MPC) approach that is frequently used in the Control Theory. This methodology is based on the conditional mean-variance (MV) optimization with a given prediction horizon at rebalance periods.
Finally, I perform out-of-sample simulations of MPC portfolios in the Japanese stock market (TOPIX500). Even taking realistic transaction costs into account, empirical simulation demonstrates that the performance is stable for any out-of-sample periods.