An Empirical Study Of Convergence Pair Trading Strategy Based On The Upstream And Downstream Enterprises Classification

Pairs trading has been highly used on financial investment in recent years. Hedgingthe risk of stock trading by using this strategy gets more and more popular in bankersand Securities traders. Pairs trading is an important way of hedging transactions. Byusing the temporary deviation of two stock’s prices with similar trend we can win thearbitrage. How to choose pairs stocksfor trading is the most important of the wholestrategy, such as we can classify stocks based on risk, or according to the Industry andso on. Selecting the correct pairing stock will determine the success or failure of theentire transaction.Based on previous study of different performance on zero risk investment processof the upstream and downstream enterprises,this article assumethe pairs trading basedon upstream and downstream classification gets more revenue than just based onindustry classification. This article is based on The classic matching transaction model,testing the performance of pairs stocks classified by upstream and downstreamcomparing with classic industry classiffication. Test the feasibility and the profitbility ofthe new model based on upstream and downstream classification.Generally speaking pairs trading is divided into three aspects, choosing samlestocks, selecting pairs stocks, and trading. Stock selecting has a decisive impact on thefinal yield of pairs trading. This article aims to verify the performance of different stockselecting way on the condition that pairs making and transaction model are all the same.This two stock selecting ways are upstream and downstream classification and theIndustry Classification.SSE100and SZSE100are used in this article andare analyzed by matlab, spss, andexcel. Concluding that such a pairing strategy is feasible in the Chinese stock market. Itssuccess rate, which is number of equity earnings ratio of the total number oftransactions also reached more than80%. Besides, that pairs trading based on theupstream and downstream classiffication has better performance than industryclassification is also proved by this article. The first strategy gets better yieldsrelatively.