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

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

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.

Suggested Citation

  • Wang, Jai-Jen & Lee, Jin-Ping & Zhao, Yang, 2018. "Pair-trading profitability and short-selling restriction: Evidence from the Taiwan stock market," International Review of Economics & Finance, Elsevier, vol. 55(C), pages 173-184.
    • Handle: RePEc:eee:reveco:v:55:y:2018:i:c:p:173-184
    DOI: 10.1016/j.iref.2017.07.021
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    References listed on IDEAS

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    More about this item

    Keywords

    Pair trading; FTSE TWSE Taiwan 50 index; Distance filter; Frequency filter; Short-selling restriction;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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