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Is pairs trading profitable on China AH-share markets?

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  • Mao Liang Li
  • Chin Man Chui
  • Chang Qing Li

Abstract

Using the daily data for 38 companies during the period of 2009-2013, this article examines the long-run equilibrium between the stock prices of firms dual listed on A-share market in China and H-share market in Hong Kong, and exploits the arbitrage opportunity for investors. We propose a simple self-financing trading strategy which is derived from the short-run disequilibrium price path. Our results demonstrate that cointegration and error-correction mechanism exist between the A-share and the H-share. In addition, our proposed trading strategy actually beats the markets and provides superior performance in terms of Sharp Ratio and value at risk statistics. Further analysis on international asset pricing model demonstrates that our trading strategy yields an average annualized excess return of about 17.6% when adjusted for the systematic risk.

Suggested Citation

  • Mao Liang Li & Chin Man Chui & Chang Qing Li, 2014. "Is pairs trading profitable on China AH-share markets?," Applied Economics Letters, Taylor & Francis Journals, vol. 21(16), pages 1116-1121, November.
    • Handle: RePEc:taf:apeclt:v:21:y:2014:i:16:p:1116-1121
    DOI: 10.1080/13504851.2014.912030
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    Citations

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    Cited by:

    1. Yu, Philip L.H. & Lu, Renjie, 2017. "Cointegrated market-neutral strategy for basket trading," International Review of Economics & Finance, Elsevier, vol. 49(C), pages 112-124.
    2. Danni Chen & Jing Cui & Yan Gao & Leilei Wu, 2017. "Pairs trading in Chinese commodity futures markets: an adaptive cointegration approach," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(5), pages 1237-1264, December.
    3. Xunfa Lu & Zhitao Ye & Kin Keung Lai & Hairong Cui & Xiao Lin, 2022. "Time-Varying Causalities in Prices and Volatilities between the Cross-Listed Stocks in Chinese Mainland and Hong Kong Stock Markets," Mathematics, MDPI, vol. 10(4), pages 1-19, February.
    4. Marianna Brunetti & Roberta De Luca, 2023. "Pairs trading in the index options market," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 13(1), pages 145-173, March.
    5. Krauss, Christopher, 2015. "Statistical arbitrage pairs trading strategies: Review and outlook," FAU Discussion Papers in Economics 09/2015, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
    6. Marianna Brunetti & Roberta De Luca, 2021. "Pairs Trading In The Index Options Market," CEIS Research Paper 512, Tor Vergata University, CEIS, revised 02 Sep 2021.
    7. Andreas Mikkelsen, 2018. "Pairs trading: the case of Norwegian seafood companies," Applied Economics, Taylor & Francis Journals, vol. 50(3), pages 303-318, January.
    8. Qiuyuan Lei & Muhammad Umer Quddoos Attari & Mustansar Hayat & Muhammad Munir Ahmad & Abdul Haseeb & Amir Rafique, 2023. "Mapping the Themes Underlying the Literature on Cross-Listing of Shares—A Contemporary Corporate Strategy of Sustainable Growth," Sustainability, MDPI, vol. 15(12), pages 1-26, June.
    9. Fernando Caneo & Werner Kristjanpoller, 2021. "Improving statistical arbitrage investment strategy: Evidence from Latin American stock markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 4424-4440, July.

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