The profitability of pairs trading strategies on Hong-Kong stock market: distance, cointegration, and correlation methods

Baiquan Ma and Robert Ślepaczuk
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Baiquan Ma: University of Warsaw, Faculty of Economic Sciences, Quantitative Finance Research Group

No 2022-02, Working Papers from Faculty of Economic Sciences, University of Warsaw

Abstract: This research aims to compare the profitability of correlation-based pair trading strategy, cointegration-based pair trading strategy, and distance-based pair trading strategy on the Hong Kong stock market. We try to build an effective pair trading strategy based on 50 stocks listed in the Hang Seng index joining them in market-neutral pairs. The dataset has a daily frequency and covers the period from 07/01/2013 to 07/01/2020. The result shows that all three methods are profitable in the Hong Kong stock market and can beat the market with regard to risk-adjusted return metrics. This result is quite sensitive to the varying number of pairs traded and rebalancing period and less sensitive to financial leverage degree. Moreover, the cointegration method is superior as compared to the correlation method and distance method.

Keywords: algorithmic trading strategies; robust optimisation criteria; overoptimisation; walk-forward optimisation; ensemble investment model (search for similar items in EconPapers)
JEL-codes: C14 C4 C45 C53 C58 G13 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2022
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https://www.wne.uw.edu.pl/download_file/1240/0 First version, 2022 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:war:wpaper:2022-02

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