Pairs Trading Strategy Applied In Chinese A-Share Market

With the changes in the economic environment, and the development of financial markets, the demand of Chinese investors have become diversifying. On the one hand, in recent years, Chinese A-share market is in a tumbled trend in general. In a stock market which only allowed to buy stocks, making a profit through the traditional method of buy low and sell high in the stock market has become increasingly difficult; On the other hand, a variety of new financial products have been launched, which opens the door for the use of a variety of investment strategies. In March2010, with the introduction of margin trading system, the A-share market is no longer a purely unilateral market, and there is a possibility to short A-share to make a profit. Investors in the A-share market made it possible to make a profit through pairs trading strategy. In the western capital markets, pairs trading has become a low-risk, stable-income strategy, this paper attempts to study the feasibility of pairs trading used in Chinese A-share market.By reviewing the literature, this paper uses the stock price data from2010to2012to make an empirical analysis of pairs trading. First screened by correlation analysis, we get two stocks for pairs trading, and then we run unit root test and cointegration test on the two stocks, if everything goes right, we construct a portfolio of these two stocks, and we establish the trading rules through constant variance model operation. We use the sample data for the pairs matching, and the data out of the sample for the forecast period. The operating results show the lack of constant variance model, so to improve the strategy, we established a new method based on the operation of the GARCH model. Compare these two approaches from several angles of the return, risk and other facts, we finally concluded that, pairs trading strategy based on statistical arbitrage is an investment strategy doesn’t based on the judgment of the overall market trend and is independent of market trends. The use of pair trading strategy is feasible in Chinese A-share market. Strategy based on GARCH model operation is slightly better than the constant variance operating strategy.