Economics at your fingertips  

Cointegrated market-neutral strategy for basket trading

Philip L.H. Yu and Renjie Lu

International Review of Economics & Finance, 2017, vol. 49, issue C, 112-124

Abstract: Cointegration among two or more variables can be found in many economic or financial data. A typical application is to form portfolios based on the cointegrated relationships found in a set of financial assets in an attempt to generate profits. However, some high-net worth investors may find these portfolios too risky, particularly during a bear market, and hence they lose interest in adopting them in their trading strategies. A plausible method to relieve such burden to the investors is to construct a cointegrated portfolio which is also market-neutral. We name such cointegrated market-neutral portfolio as COINMAN. In this paper, we will tackle the problem of identifying COINMAN. We will discuss how to determine the number of COINMAN portfolios available among a set of assets. Finally, we apply the proposed methodology to identify COINMAN portfolios consisting of the constituent stocks of Hang Seng Index and Hang Seng China-Affiliated Corporations Index in Hong Kong. Our empirical results demonstrate that the trading strategies based on COINMAN portfolios are more profitable and less sensitive to the market than their cointegrated counterparts.

Keywords: Basket trading; Pairs trading; Cointegration; Market neutral; C22; G12 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this article

International Review of Economics & Finance is currently edited by H. Beladi and C. Chen

More articles in International Review of Economics & Finance from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

Page updated 2019-01-19
Handle: RePEc:eee:reveco:v:49:y:2017:i:c:p:112-124