A Research Into Pairs Trading Strategy Based On Cointegration And Correlation Coefficient

With the introduction of margin trading business in the A-share market,Chinese investors can short A-share to make a profit.The statistics arbitrage strategies can be used with the short rules. The main features of statistical arbitrage are the market neutral and low correlation with market trend.when the market has no significant trend opportunity, statistics arbitrage strategies can avoid the impact of the systemic risk.Pair trading strategy from the statistical arbitragies and correlation coefficient is studied. Price correlation, return rate correlation, T-statistic of Cointegration test,T-statistic of residuals ADF test are the four indicators be tested. Top 20 pairs of stocks are choosed by each indicator. The success rate of backtest is used to measure the indicators.Different stock market environments are compared by the success rate of backtests. The findings conclude that the pairs trading strategy is effective. T-statistic of Cointegration’s successful rate is the highest, return rate correlation’s failure rate is the lowest.Parameter of cointegration test is sensitive, pairs with no cointegration can be considered having cointegration. From the co-integration test parameters,the ST stocks are considered having cointegration with many stocks, but in fact there is a big difference between ST stocks and common stocks, so this cointegration is unreliable. Pairing success rate policy is influenced by the market environment. In the shock market environment, the pair trading strategy is more effective.