Arbitrage Trading Based on Cointegration

Daisuke Motori and Yukitami Tsuji
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Daisuke Motori: Ibbotson Associates Japan
Yukitami Tsuji: Keio University, Faculty of Business and Commerce

No 2012-019, Keio/Kyoto Joint Global COE Discussion Paper Series from Keio/Kyoto Joint Global COE Program

Abstract: Does arbitrage trading based on a cointegrating relation work? The efficient market hypothesis insists that there exists no successful trading. In order to avoid problems with data snooping, we choose 5 industrial average indices and a market index to make a cointegration analysis between 6 variables. Many cointegrating relations are found in 3 countries; Japan, the UK, and the USA. Using the facts, we simulate arbitrage trading between a market index and an industrial averages portfolio for each country. The calculation of this simulation shows that the arbitrage is successful. The average returns on the trading are monthly 0.3% to 0.5%.

Pages: 14 pages
Date: 2012-11
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