Designing Efficient Pair-Trading Strategies for the Technology Stock Market

Research Article
Open access

Designing Efficient Pair-Trading Strategies for the Technology Stock Market

Yangxuan Liu 1 , Mingyuan Gao 2* , Yiyang Guo 3 , Yichen Qiao 4
  • 1 University of Southern California    
  • 2 Columbia University    
  • 3 University of Warwick    
  • 4 Shanghai Jiao Tong University    
  • *corresponding author mg4504@columbia.edu
Published on 28 August 2024 | https://doi.org/10.54254/2754-1169/106/20241453
AEMPS Vol.106
ISSN (Print): 2754-1177
ISSN (Online): 2754-1169
ISBN (Print): 978-1-83558-541-2
ISBN (Online): 978-1-83558-542-9

Abstract

Pairs trading is a quantitative trading approach that exploits instances of financial markets exhibiting disequilibrium. Through the identification of a pair of stocks with a his-torical pattern of correlated movement, and under the assumption that their price differentials will return to a central tendency, an investor can seek to gain from this mean-reversion by establishing a long position in the designated pair. Throughout the years, numerous trading frameworks and methodologies have been devised to enhance the efficacy of this strategy. This paper proposes an approach based on cointegration and correlation, but ultimately utilizes cointegration to identify the pair trading investment strategy that can be applied to technology sector stocks and metal futures in China over the last five years. The top five ranked portfo-lios are then evaluated. The results indicate that the pairs with Silver and Copper exhibited positive returns, while the pair with Palladium yielded negative returns.

Keywords:

Pairs trading is a quantitative trading approach that exploits instances of financial markets exhibiting disequilibrium. Through the identification of a pair of stocks with a his-torical pattern of correlated movement, and under the assumption that their price differentials will return to a central tendency, an investor can seek to gain from this mean-reversion by establishing a long position in the designated pair. Throughout the years, numerous trading frameworks and methodologies have been devised to enhance the efficacy of this strategy. This paper proposes an approach based on cointegration and correlation, but ultimately utilizes cointegration to identify the pair trading investment strategy that can be applied to technology sector stocks and metal futures in China over the last five years. The top five ranked portfo-lios are then evaluated. The results indicate that the pairs with Silver and Copper exhibited positive returns, while the pair with Palladium yielded negative returns.

Liu,Y.;Gao,M.;Guo,Y.;Qiao,Y. (2024). Designing Efficient Pair-Trading Strategies for the Technology Stock Market. Advances in Economics, Management and Political Sciences,106,359-369.
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References

[1]. G.J. Miao, High frequency and dynamic pairs trading based on statistical arbitrage using a two-stage correlation and cointegration approach, Int. J. Econ. Finance 6 (2014) 96–110.

[2]. Quantitative Elliott, Robert J., John Van Der Hoek, and William P. Mal- colm. ”Pairs trading.”

[3]. Quantitative Finance, 16(10):1541–1558, 2016. H. Rad, R. K. Low, and R. Faff. The profitability of pairs trading strategies: Distance, cointegration and copula methods.

[4]. Finance 5.3 (2005): 271-276. Nicholas, J.G., Market Neutral Investing— Long/Short Hedge Fund Strategies, 2000 (Bloomberg Professional Library, Bloomberg Press: Princeton, NJ, USA).

[5]. Management Science, 65(1):370–389, 2019. H. J. Chen, S. J. Chen, Z. Chen, and F. Li. Empirical investigation of an equity pairs trading strategy.

[6]. Journal of Economic Surveys, 4(3):249–273, 1990. J. J. Dolado, T. Jenkin- son, and S. Sosvilla-Rivero. Cointegration and unit roots.

[7]. Review of Financial Studies 19 (3), 797–827. Gatev, E., Goetzmann, W. N., Rouwenhorst, K. G., 2006. Pairs trading: Performance of a relative value arbitrage rule

[8]. Journal of Economic Surveys, 31(2):513–545, 2016. C. Krauss. Statistical arbitrage pairs trad-ing strategies: Review and outlook.

[9]. Financial Analysts Journal 66 (4),83–95. Do, B., Faff, R., 2010. Does simple pairs trading still work?

[10]. Journal of Financial Research 35 (2), 261–287. Do, B., Faff, R., 2012. Are pairs trading profits robust to trading costs?

Cite this article

Liu,Y.;Gao,M.;Guo,Y.;Qiao,Y. (2024). Designing Efficient Pair-Trading Strategies for the Technology Stock Market. Advances in Economics, Management and Political Sciences,106,359-369.

Data availability

The datasets used and/or analyzed during the current study will be available from the authors upon reasonable request.

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About volume

Volume title: Proceedings of the 3rd International Conference on Business and Policy Studies

ISBN：978-1-83558-541-2(Print) / 978-1-83558-542-9(Online)
Editor：Arman Eshraghi
Conference website: https://www.confbps.org/
Conference date: 27 February 2024
Series: Advances in Economics, Management and Political Sciences
Volume number: Vol.106
ISSN：2754-1169(Print) / 2754-1177(Online)

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References

[1]. G.J. Miao, High frequency and dynamic pairs trading based on statistical arbitrage using a two-stage correlation and cointegration approach, Int. J. Econ. Finance 6 (2014) 96–110.

[2]. Quantitative Elliott, Robert J., John Van Der Hoek, and William P. Mal- colm. ”Pairs trading.”

[3]. Quantitative Finance, 16(10):1541–1558, 2016. H. Rad, R. K. Low, and R. Faff. The profitability of pairs trading strategies: Distance, cointegration and copula methods.

[4]. Finance 5.3 (2005): 271-276. Nicholas, J.G., Market Neutral Investing— Long/Short Hedge Fund Strategies, 2000 (Bloomberg Professional Library, Bloomberg Press: Princeton, NJ, USA).

[5]. Management Science, 65(1):370–389, 2019. H. J. Chen, S. J. Chen, Z. Chen, and F. Li. Empirical investigation of an equity pairs trading strategy.

[6]. Journal of Economic Surveys, 4(3):249–273, 1990. J. J. Dolado, T. Jenkin- son, and S. Sosvilla-Rivero. Cointegration and unit roots.

[7]. Review of Financial Studies 19 (3), 797–827. Gatev, E., Goetzmann, W. N., Rouwenhorst, K. G., 2006. Pairs trading: Performance of a relative value arbitrage rule

[8]. Journal of Economic Surveys, 31(2):513–545, 2016. C. Krauss. Statistical arbitrage pairs trad-ing strategies: Review and outlook.

[9]. Financial Analysts Journal 66 (4),83–95. Do, B., Faff, R., 2010. Does simple pairs trading still work?

[10]. Journal of Financial Research 35 (2), 261–287. Do, B., Faff, R., 2012. Are pairs trading profits robust to trading costs?

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