Profit Assessment of Pairs Trading Strategy: A Case Study of Component Stocks in Polaris Taiwan Top 50
Date Issued
2014
Date
2014
Author(s)
Hsu, Min-Chun
Abstract
Pairs trading strategy makes a profit by building a short position on overvalued stock and a long position on the undervalued one when they diverge and closing the position when they converge to the mean.
In this study, stocks are choosen by minimum distance and mean reversion in historical normalized price space from P-shares Taiwan Top 50 ETF over the period 2005 to 2013.The trade period was chosen as 3 months because P-shares Taiwan Top 50 ETF update its composition very season .Open positions on two-standard deviation spread.
The average return without transaction costs is 0.0501 and the average return with transaction costs is -0.2667 between 2005 and 2013. The results indicate that the average return with transaction costs is negative and the trading profits with transaction costs are lower than risk-free interest rate and the stock market return for the same time period. The conclusion of this paper is that pairs trading strategy wasn’t a profitable strategy at Taiwan’s stock market in study period.
Subjects
配對交易
最小距離法
Type
thesis
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