Research On The Application Of Stock And Duration Strategy Based On Statistical Arbitrage In China 's A - Share Market

Long-short equity strategy is one of the common investment strategies of hedge funds, especially the market neutral strategy based on the statistical arbitrage had become a ripe long-short strategy which has more than 20 years of development history. The investment philosophy of statistical arbitrage is trying to find the long-term equilibrium between the pairs’ spread, and start trading when the spread increasing and has been too large. The strategy makes profits from the decreasing of the spread.According to the market history of USA, in the early 21st century, the strategy had become invalid, after the best time for statistical arbitrage in 1980s and early 1990s.Although the strategy performance was undulate, there are part of hedge funds still using statistical arbitrage as their investment strategy.As the restriction of short equity, the long-short strategy can’t be used until the CSRC allowed the securities companies launched the short-selling trial in Jan.2010.After that, short stock had been possible, and this is the mark of the Chinese stock market stepping into "The Time of Hedging". However the mutual funds are protected from using leverage, the short-selling service are often used by the individual investors and hedge funds.This paper will attempt to use the co-integration model to characterize the equilibrium relationship between the pairs, and use ARCH model to describe heteroscedasticity phenomenon exists in financial time series. After modeling, the paper will use Matlab to prepare statistical arbitrage trading program, and use the stock data in the second half of 2014 for back testing. The paper will show application and limitations of statistical arbitrage strategy in Chinese equity market according to the back-test result.