Applying Hurst Exponent in Pair Trading Strategies

Quynh Bui and Robert Ślepaczuk
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Quynh Bui: Faculty of Economic Sciences, University of Warsaw

No 2020-39, Working Papers from Faculty of Economic Sciences, University of Warsaw

Abstract: This research aims to seek an alternative approach to pair selection for the purpose of pair trading strategy. We try to build an effective pair trading strategy based on 103 stocks listed in NASDAQ-100 index. The dataset has daily frequency and covers the period from 01/01/2000 to 31/12/2018. In this study, Generalized Hurst Exponent, Correlation and Cointegration are employed to detect the mean-reverting pattern in the time series of linear combination of each pair of stock. The result show that Hurst method cannot outperform the benchmark, which implies that market is efficient. This result is quite sensitive to varying number of pairs traded and rebalancing period and less sensitive to financial leverage degree. Moreover, Hurst method is better than cointegration method but is not superior as compared to correlation method.

Keywords: generalized Hurst & Hurst exponent; algorithmic trading strategies; portfolio choice; mean-reversion strategy; pair trading; correlation & cointegration trading; efficient market hypothesis (search for similar items in EconPapers)
JEL-codes: C14 C15 C4 C52 C53 C58 G11 G12 G14 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:war:wpaper:2020-39

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