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Date Submitted: 08/07/2011 09:37 PM
Evaluation of Pairs Trading Strategy in the Japanese Market
Yuxuan Xiong
Australian National University
Author Note
Supervisor: David Tan Group: Bears and Pairs Date: 2011.08.05
Abstract
Pairs trading strategy was first invented in late 80s and 50 million dollars profit was reported. The key points of making profit are identification of good pairs and efficient trading algorithm. The herding behavior of Japanese firms and the unique corporate organization, Keiretsu, in Japan lead to a result that stocks from different industry tend to be highly correlated. Therefore, more potential pairs are provided and high profit is expected. This research will focus on the relationship between profit of pairs trading and Keiretsu and will show whether the profit for Keiretsu firms will dominant and whether the profit will be more stable through out time under different market conditions. Besides, the existence of higher excess return under bear market will also be examined.
Keywords: Keiretsu, pairs trading
Contents
Introduction 4
Research Design 6
Construct the Pairs Trading Algorithm 7
Compare the performances of two groups 9
Transaction Cost 10
commission fee 10
cost of market impact 11
Data 11
Evaluation of Pairs Trading Strategy in the Japanese Market
Introduction
Pairs trading strategy is a market neutral strategy, which attempts to statistically pick up two stocks as a pair that move together in the past and take long and short positions to make profit. This strategy is a statistical arbitrage strategy to take advantage of market inefficiency. The implementation of this strategy is: arbitrageurs find two stocks whose price move together over an indicated historical observation period and short the increasing-price stock while simultaneously long the decreasing-price stock when the price of these two stocks diverge, hoping they will converge in the future and close positions by then. This strategy was first developed by...