Empirical Research Of Pairs Trading Strategy And The Impact From Asset Price Jumping Behavior

Pairs trading, as a kind of statistical arbitrage method, is widely used in developed financial markets. Last year, stock index future and security margin trading were promoted in Chinese financial market that facilitate the application of such trading strategy, including pairs tradingThis paper simulated and analyzed the performance of pairs trading in Chinese stock market, based on roll correlation method and roll cointegration method. Found that pairs trading strategy could yield stable return. Industries whose structure is not complex and risk source is narrow such as mining industry and finance industry are more likely to form stable pairs and yield stable arbitrage profit. This paper also analyzed the setting parameter sused in strategyBesides, this paper also analyzed the impact from jumping and cojumping behavior to the strategy performance. Jumping behavior may lead away the pairs relationship and thus create the arbitrage gap. This paper used three most popular jumping and cojumping tests to uncover the relationship between jumping and trading, and also compared the application of these jumping tests.The study enriches the understanding of pairs trading and related statistical arbitrage strategy and offers support for further research. Besides, this study is kind of originative in fields of designing trading strategy and empirical research of jumping and cojumping behavior.