American Journal of Business and Society
Articles Information
American Journal of Business and Society, Vol.5, No.3, Sep. 2020, Pub. Date: Sep. 28, 2020
A Profitable Stock Investment System Using the Cointegration Technique
Pages: 155-164 Views: 95 Downloads: 46
[01] Carol Anne Hargreaves, Department of Statistics and Applied Probability, Faculty of Science, National University of Singapore, Singapore.
[02] Jariah Bte Abdul Nassar, Department of Statistics and Applied Probability, Faculty of Science, National University of Singapore, Singapore.
[03] Hu Yiming, Department of Statistics and Applied Probability, Faculty of Science, National University of Singapore, Singapore.
Pairs trading is a quantitative trading strategy that exploits financial markets that are out of equilibrium. The aim of this study is to identify stocks that behave in a similar manner, however, when there is a temporary divergence, there is an opportunity to make money. There are numerous ways to choose pairs of stocks to implement this trading strategy, the method we chose is cointegration. In the paper, we aim to show that the pairs trading strategy using cointegration is a robust method that consistently reaps profits across consecutive time periods as well as different sectors in the Australian stock market. Our results prove this; we saw great profits in our trading periods, with the greatest being a hefty 38%. The results further demonstrate that pairs trading is effective; profits were positive across two periods and three sectors. Furthermore, in 5 out of these 6 scenarios, our strategy made profits that are at least 2 times greater than the market profit.
Stocks Analysis, Trading Strategies, Market Neutral Trading Strategy, Cointegration, Pairs Trading, Australian Stock Market
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