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Dynamic Pairs Trading Strategy For The Companies Listed In The Istanbul Stock Exchange

Author

Listed:
  • Bolgun, Evren
  • Kurun, Engin
  • Guven, Serhat

Abstract

In this research we performed pairs trading strategy based on a comparative mean reversion of asset prices with daily data over the period 2002 through 2008 in Istanbul Stock Exchange. We did not categorize stock pairs by sectors and therefore it is possible to observe mean reversion characteristics of different stocks that are selected from ISE-30 index. The initial formation period is 125 days (approx. 6 months) while we measure the performance results daily. Then both formation process and trading strategies have been structured as dynamic (rolling windows) market trading model through 2008. The results indicate that pairs produced average returns of % 3.36 daily comparing with the naïve buy and hold strategy. However ISE30 daily average return performance % 0.038 between 2002-2008 period. Our trading constraints and trading commissions take away the excess return on pairs mostly. Furthermore, the performance analysis reveals that the pairs trading strategy yields excess returns with less volatility than the market portfolio.

Suggested Citation

  • Bolgun, Evren & Kurun, Engin & Guven, Serhat, 2009. "Dynamic Pairs Trading Strategy For The Companies Listed In The Istanbul Stock Exchange," MPRA Paper 19887, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:19887
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    File URL: https://mpra.ub.uni-muenchen.de/19887/1/MPRA_paper_19887.pdf
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    References listed on IDEAS

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    1. Evan Gatev & William N. Goetzmann & K. Geert Rouwenhorst, 2006. "Pairs Trading: Performance of a Relative-Value Arbitrage Rule," The Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 797-827.
    2. Fama, Eugene F, 1991. "Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-1617, December.
    3. Perlin, M., 2007. "M of a kind: A Multivariate Approach at Pairs Trading," MPRA Paper 8309, University Library of Munich, Germany.
    4. K. Triantafyllopoulos & G. Montana, 2011. "Dynamic modeling of mean-reverting spreads for statistical arbitrage," Computational Management Science, Springer, vol. 8(1), pages 23-49, April.
    5. Perlin, M., 2007. "Evaluation of pairs trading strategy at the Brazilian financial market," MPRA Paper 8308, University Library of Munich, Germany.
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    Cited by:

    1. R. Todd Smith & Xun Xu, 2017. "A good pair: alternative pairs-trading strategies," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 31(1), pages 1-26, February.
    2. Wang, Xi & Bao, Si & Chen, Jingchao, 2017. "High-frequency stock linkage and multi-dimensional stationary processes," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 468(C), pages 70-83.

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    More about this item

    Keywords

    mean reversion; pairs trading; distance method; market neutral portfolio; Istanbul Stock Exchange; trading strategies;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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