Resumen
This paper proposes a VECM representation for cointegrated assets in the continuous-
time framework. This model implies a simple framework to check for cointegration
exploiting the restriction that the stationarity of price spread requires positive
convergent speed. A pair of cointegrated assets is then identi ed to derive a dy-
namically optimal pairs trading portfolio with a risk-free bond. This involves
maximizing the portfolio value at terminal time without the requirement of a func-
tional form for investor´s preferences. To this end, we connect the derived optimal
portfolio with European-type spread options and in consequence the optimal in-
vestment policies can be modeled using the spread option's resulting delta hedging
strategies. Our framework is tested empirically using pairs identi ed from the
Dow Jones Industrial Average. This analysis requires maximum likelihood esti-
mates on continuous VECM parameters, compared to the benchmark Johansen
methodology. We nd that the proposed optimal strategy delivers consistent prof-
itability and outperforms the Johansen method commonly applied in the previous
literature.
