Pair-trading profitability and short-selling restriction: Evidence from the Taiwan stock market

Jai-Jen Wang, Jin-Ping Lee and Yang Zhao

International Review of Economics & Finance, 2018, vol. 55, issue C, 173-184

Abstract: This paper examines the profitability of a pair-trading strategy in the Taiwan stock market while considering alternative frequency-distance filters, thresholds for opening a pair trade relationship, reinvestment mechanisms, different lengths of trading period, industry boundary, and the short-selling restriction. In contrast with the recent literature showing that pair-trading strategy returns are insignificant and negative in the Taiwan stock market, we find that the profitabilities of pair trades developed by positions in the Taiwan 50 Index during 1990/1–2016/3 present significant annualized mean returns of 1.84%–3.04%. Moreover, thresholds with different stringent degrees, industry boundary, and alternative reinvestment mechanisms are unable to help pick out more profitable pair-trading portfolios. The distance filter and shorter trading-day setting are more reliable for pair trading. Finally, the deregulation on short selling results in more pair-trading activities, which obviously diminish the profitability of a pair-trading strategy.

Keywords: Pair trading; FTSE TWSE Taiwan 50 index; Distance filter; Frequency filter; Short-selling restriction (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:55:y:2018:i:c:p:173-184

DOI: 10.1016/j.iref.2017.07.021

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