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

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  • 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.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 19887.

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Date of creation: Oct 2009
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Handle: RePEc:pra:mprapa:19887

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Related research

Keywords: mean reversion; pairs trading; distance method; market neutral portfolio; Istanbul Stock Exchange; trading strategies;

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  1. Perlin, M., 2007. "M of a kind: A Multivariate Approach at Pairs Trading," MPRA Paper 8309, University Library of Munich, Germany.
  2. 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.
  3. 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.
  4. Perlin, M., 2007. "Evaluation of pairs trading strategy at the Brazilian financial market," MPRA Paper 8308, University Library of Munich, Germany.
  5. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
  6. S. Illeris & G. Akehurst, 2001. "Introduction," The Service Industries Journal, Taylor & Francis Journals, vol. 21(1), pages 1-4, January.
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