Abstract
We carry out a large-scale empirical data analysis to examine the efficiency of the so-called pairs trading. On the basis of relevant three thresholds, namely, starting, profit taking, and stop loss for the ‘first-passage process’ of the spread (gap) between two highly correlated stocks, we construct an effective strategy to make a trade via ‘active’ stock-pairs automatically. The algorithm is applied to 1784 stocks listed in the first section of the Tokyo Stock Exchange leading up to totally 1,590,436 pairs. We are numerically confirmed that the asset management by means of the pairs trading works effectively at least for the past three years (2010–2012) data sets in the sense that the profit rate becomes positive (totally positive arbitrage) in most cases of the possible combinations of thresholds corresponding to ‘absorbing boundaries’ in the literature of first-passage processes.
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Acknowledgments
This work was financially supported by Grant-in-Aid for Scientific Research (C) of Japan Society for the Promotion of Science No. 2533027803 and Grant-in-Aid for Scientific Research (B) of Japan Society for the Promotion of Science No. 26282089. We were also supported by Grant-in-Aid for Scientific Research on Innovative Area No. 2512001313. One of the authors (JI) thanks Anirban Chakraborti for his useful comments on this study at the early stage.
Conflict of interest
On behalf of all authors, the corresponding author (JI) states that there is no conflict of interest.
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Murota, M., Inoue, Ji. Large-scale empirical study on pairs trading for all possible pairs of stocks listed in the first section of the Tokyo Stock Exchange. Evolut Inst Econ Rev 12, 61–79 (2015). https://doi.org/10.1007/s40844-015-0002-5
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DOI: https://doi.org/10.1007/s40844-015-0002-5
Keywords
- Pairs trading
- Empirical data analysis
- Financial time series
- First-passage processes
- Tokyo Stock Exchange
- Econophysics