Long-run relations among equity indices under different market conditions: Implications on the implementation of statistical arbitrage strategies
AbstractCompared with previous research, the present work extends existing literature by considering long-run relations among major international stock market indices, under different market conditions, and the implications of these relations on the implementation of statistical arbitrage strategies. The examined data contain two bust phases interrupted by a mild bullish period. Employing cointegration analysis, reported results initially indicate that changes in market performance affect the stability of long-run relations, therefore suggesting that arbitrageurs should perform rebalancing among the examined indices when a change in a market trend is evident. Furthermore, extreme market performance harms the mean-reverting properties of a potential long-run relation while moderate market performance points to cointegration between a pair of indices. However, the absence of a stationary spread does not suggest the potential of abnormal returns realization, in the short-run, through exploitation of deviations from its mean value. The applicability of our results may be of importance to market participants since the cointegration approach has recently received considerable attention by hedge funds adopting statistical arbitrage strategies.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.
Volume (Year): 20 (2010)
Issue (Month): 4 (October)
Contact details of provider:
Web page: http://www.elsevier.com/locate/intfin
Cointegration International stock markets Statistical arbitrage;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Grieb, Terrance & Reyes, Mario G, 1999. "Random Walk Tests for Latin American Equity Indexes and Individual Firms," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 22(4), pages 371-83, Winter.
- Juselius, Katarina, 2006. "The Cointegrated VAR Model: Methodology and Applications," OUP Catalogue, Oxford University Press, number 9780199285679.
- Choudhry, Taufiq, 1997. "Stochastic Trends in Stock Prices: Evidence from Latin American Markets," Journal of Macroeconomics, Elsevier, vol. 19(2), pages 285-304, April.
- Laopodis, Nikiforos T. & Sawhney, Bansi L., 2002. "Dynamic interactions between Main Street and Wall Street," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(4), pages 803-815.
- Evan G. Galev & William N. Goetzmann & K. Geert Rouwenhorst, 1999.
"Pairs Trading: Performance of a Relative Value Arbitrage Rule,"
NBER Working Papers
7032, National Bureau of Economic Research, Inc.
- Evan Gatev & William N. Goetzmann & K. Geert Rouwenhorst, 2006. "Pairs Trading: Performance of a Relative-Value Arbitrage Rule," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 797-827.
- William Goetzmann & Evan g. Gatev & K. Geert Rouwenhorst, 1998. "Pairs Trading: Performance of a Relative Value Arbitrage Rule," Yale School of Management Working Papers ysm3, Yale School of Management.
- William N. Goetzmann & Evan Geov Gatev & K. Geert Rouwenhorst, 1998. "Pairs Trading: Performance of a Relative Value Arbitrage Rule," Yale School of Management Working Papers ysm109, Yale School of Management.
- Evan Gatev & William N. Goetzmann & K. Geert Rouwenhorst, 1998. "Pairs Trading: Performance of a Relative Value Arbitrage Rule," Yale School of Management Working Papers ysm26, Yale School of Management.
- Forbes, Catherine S & Kalb, Guyonne R J & Kofman, Paul, 1999.
"Bayesian Arbitrage Threshold Analysis,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 17(3), pages 364-72, July.
- Forbes, C.S. & Kalb, G.R.J. & Kofman, P., 1997. "Bayesian Arbitrage Threshold Analysis," Monash Econometrics and Business Statistics Working Papers 3/97, Monash University, Department of Econometrics and Business Statistics.
- Urrutia, Jorge L, 1995. "Tests of Random Walk and Market Efficiency for Latin American Emerging Equity Markets," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 18(3), pages 299-309, Fall.
- Peter Huber, 1997. "Stock market returns in thin markets: evidence from the Vienna Stock Exchange," Applied Financial Economics, Taylor & Francis Journals, vol. 7(5), pages 493-498.
- Andrew W. Lo, A. Craig MacKinlay, 1988.
"Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test,"
Review of Financial Studies,
Society for Financial Studies, vol. 1(1), pages 41-66.
- Andrew W. Lo & A. Craig MacKinlay, 1989. "Stock Market Prices Do Not Follow Random Walks: Evidence From a Simple Specification Test," NBER Working Papers 2168, National Bureau of Economic Research, Inc.
- Tom Doan, . "VRATIO: RATS procedure to implement variance ratio unit root test procedure," Statistical Software Components RTS00231, Boston College Department of Economics.
- Kremers, Jeroen J M & Ericsson, Neil R & Dolado, Juan J, 1992.
"The Power of Cointegration Tests,"
Oxford Bulletin of Economics and Statistics,
Department of Economics, University of Oxford, vol. 54(3), pages 325-48, August.
- Ronald Balvers & Yangru Wu & Erik Gilliland, 2000. "Mean Reversion across National Stock Markets and Parametric Contrarian Investment Strategies," Journal of Finance, American Finance Association, vol. 55(2), pages 745-772, 04.
- Chaudhuri, Kausik & Wu, Yangru, 2003. "Random walk versus breaking trend in stock prices: Evidence from emerging markets," Journal of Banking & Finance, Elsevier, vol. 27(4), pages 575-592, April.
- Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
- Paresh Kumar Narayan & Russell Smyth, 2004. "Is South Korea's stock market efficient?," Applied Economics Letters, Taylor & Francis Journals, vol. 11(11), pages 707-710.
- James M. Poterba & Lawrence H. Summers, 1989.
"Mean Reversion in Stock Prices: Evidence and Implications,"
NBER Working Papers
2343, National Bureau of Economic Research, Inc.
- Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October.
- Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 203-233.
- Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 246-73, April.
- Paresh Kumar Narayan & Seema Narayan, 2007. "Mean reversion in stock prices: new evidence from panel unit root tests," Studies in Economics and Finance, Emerald Group Publishing, vol. 24(3), pages 233-244, September.
- Brian Jacobsen, 2008. "Demonstrating error-correction modelling for intraday statistical arbitrage," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 4(4), pages 287-292.
- Oleg Bondarenko, 2003. "Statistical Arbitrage and Securities Prices," Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 875-919, July.
- Fabozzi, Frank J & Francis, Jack Clark, 1977. "Stability Tests for Alphas and Betas over Bull and Bear Market Conditions," Journal of Finance, American Finance Association, vol. 32(4), pages 1093-99, September.
- Xiaming Liu & Haiyan Song & Peter Romilly, 1997. "Are Chinese stock markets efficient? A cointegration and causality analysis," Applied Economics Letters, Taylor & Francis Journals, vol. 4(8), pages 511-515.
- Kawakatsu, Hiroyuki & Morey, Matthew R, 1999. "An Empirical Examination of Financial Liberalization and the Efficiency of Emerging Market Stock Prices," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 22(4), pages 385-411, Winter.
- Narayan, Paresh Kumar & Smyth, Russell, 2007. "Mean reversion versus random walk in G7 stock prices evidence from multiple trend break unit root tests," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 17(2), pages 152-166, April.
- Numan Ülkü, 2011. "Modeling Comovement among Emerging Stock Markets: The Case of Budapest and Istanbul," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 61(3), pages 277-304, July.
- Yunus, Nafeesa & Swanson, Peggy E., 2012. "Changing integration of EMU public property markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(1), pages 194-208.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.