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Cointegration and Deterministic Spread-Based Stock Pair Trading Strategy

Author

Listed:
  • Mehmet Horasanlı

    (İş Portföy Yönetimi A.Ş.)

  • Alper Özdamar

    (Allianz)

Abstract

This study investigates the profitability of an investment strategy known as “pairs trading” on selected stocks from Istanbul Stock Exchange National 100 index. The stock universe is narrowed due to liquidity issues and divided into groups such as banking, insurance etc. to ensure the existence of fundamental reasons for mean reversion. Trading rules are based on the long and short term spread between the selected stocks and a final filtering with respect to ADF statistic is conducted. Results indicate that our pairs trading strategy provides a superior performance to the index itself and ADF filtering makes the pair selection procedure more reliable.

Suggested Citation

  • Mehmet Horasanlı & Alper Özdamar, 2012. "Cointegration and Deterministic Spread-Based Stock Pair Trading Strategy," Journal of Finance Letters (Maliye ve Finans Yazıları), Maliye ve Finans Yazıları Yayıncılık Ltd. Şti., vol. 27(94), pages 97-118, January.
    • Handle: RePEc:acc:malfin:v:27:y:2012:i:94:p:97-118
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