The Application Research On Pair Trading Strategies In China’s Stock Market

With the launch of "Short Purchase&Short Sale" in March31,2010, China’s stock market has ushered a brand new age of hedging. Investment institutions have begun to introduce investment methods from foreign hedge funds, some of which have even established funds operated by hedging methods. Therefore, it is of great theoretical and realistic significance to study the profitability of investment methods from foreign hedge funds and its size of application in China’s stock market.This paper concentrates on pair trading strategies widely used by foreign hedge funds. By summarizing related studies, we design a practical pair trading strategy, which gains an approximately8%annualized rate of return during our simulated tests using historical data from the latest three years.By comparing results of simulated pair trading before and after the launch of "Short Purchase&Short Sale", we find a smaller strategic yield and spread volatility after the initiative. Through multiple regression analysis, we verify the results that "Short Purchase&Short Sale" reduces strategic yields and spread volatility of pair trading evidently. Based on prior research, we reach the following conclusion: hedging investment has taken up a considerable size in China’s stock market; with an increasing number of investors engaged in arbitrage trading, arbitrage opportunities are reducing, while mispricing of securities is getting corrected.