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Arbitrage Trading Based on Cointegration

Author

Listed:
  • Daisuke Motori

    (Ibbotson Associates Japan)

  • Yukitami Tsuji

    (Keio University, Faculty of Business and Commerce)

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%.

Suggested Citation

  • Daisuke Motori & Yukitami Tsuji, 2012. "Arbitrage Trading Based on Cointegration," Keio/Kyoto Joint Global COE Discussion Paper Series 2012-019, Keio/Kyoto Joint Global COE Program.
    • Handle: RePEc:kei:dpaper:2012-019
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    File URL: https://ies.keio.ac.jp/old_project/old/gcoe-econbus/pdf/dp/DP2012-019.pdf
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    References listed on IDEAS

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