Empirical Studies On Pair Trading Strategy Based On Convergence Test

Recent years, hedge funds is becoming more and more popular among the investingpublic because of its quality of getting absolute returns and flexible strategies. As one ofthe most important strategies, pair trading strategy is also developing fast.In this paper, the author researches plenty of essays domestic and international on pairtrading strategy and hedge funds, and found that the most famous strategy among all theresearches is based on the convergence test. So we use this method as the basis, andrewrite it according to the current situation of china’s stock market. Then we empiricallystudy the pair trading strategy based on the convergence test with the data of china’s stockmarket from2008to2010to test if it could profit in China’s stock market. The resultsshow that the trading strategy based on convergence test can get a higher return rate thanthe broader market, and meantime has low revelation with the broader market, which is,the average return, the return volatility, and the Sharpe Index are all much better than thebroader market. In detail of different periods, we can see that the pair trading strategy hasan independent and significantly higher return rate compared by the broader market in thebear/adjustment market period. While in the bull market period, the pair trading strategybehaves not that well.In this paper, we mostly use the one to one match method, and in the future, we expectmore researches on portfolio with more pairs, and hope there can be further researches ofmixed strategy that not just on pair trading ones.