The Application Of Margin Trading In The Trading Strategy

Financial innovation is the way that we must taketo develop ourcountry’s financial market, and the release of margin trading is the latestmove that China promote financial innovation to further develop andperfect its basic financial market system.In one way, it will change theprofit pattern of China stock market fundamentally and provide a way toearn profit by short selling; in another, it can derive a lot of newinvestment methodsand strategies which clearthe way for the using ofstatistical arbitrage as well as pairs trading in China’s financial market.In this paper, we mainly discussed the pairs trading strategy whichwas born by the release of margin trading, reviewed the theoreticalprogress of it from start-ups to mature, and presented the latestdevelopment and research findings from home and aboard. At last, bysummarizing and combining the existing trading policy in China, wedesigned a specific pairs trading strategy which has practical applicablevalue for China’s financial market. In the empirical testing part, weselect bank of China and China citic bank as the object of study for theyhave a remarkable correlationship. The stock closing price of these twostocks from the year of2008to the year of2010are taken as the intervalsample data. By installing the improved pairs trading strategy, we canget an annual rate of return of6.01%during the mock trading in out-sample period. This data outperformed the stock market from boththe respect of rate of return and performance evaluation system based onrisk-adjusted theory. The result of the empirical testing fully reflects thefeasibility and profitability of the improved pairs trading strategy whichwe designed.The novel point of this paper is that we conduct a lot of discussionfocused on the detail of the pairs trading strategy. Firstly, weinnovatively introduce the pairs trading factor while choosing the pairstocks. Secondly, the realistictransaction costs and traderestrictionsarediscussed while we calculate the profit we gained fromexecuting the pairs trading strategy. Thirdly, we proposed apostponedtrading strategy which had been proved more profitable thanthe normal one during the building position period. All of theseenhancements make the improved pairs trading strategy that weproposed more suitable for China’s trading rules and market conditions.