Research On The Application Of Pairs Trading Strategy In Chinese A-share Market

March 31, 2010, with Shenzhen Stock Exchange and Shanghai Stock Exchange officially launched trading pilot work; securities margin trading finally took the stage from behind the scenes. Two-way trading mechanism which is Short-selling and going-long opened up. For our country, this is a new trading tool, resulting in huge changes in Chinese capital market. Pairs trading strategy once prevalent in Wall Street, it is a quantity transaction method as a precondition to short-selling. Securities margin trading provides market conditions of using this strategy. While the new tool makes investors have to face more complex trading environment, but also improves the function of A-share market in China. Pairs trading strategy is popular because it has long been proven a good tool to obtain excess returns.After reviewing the current related literatures on pairs trading, we have devised a pairs trading strategy which is more practical, straightforward and concise.This pairs trading strategy based on price ratio and the moving average standard deviation of year. In the main part of the article which is the empirical part, we selected 87 underlying stocks of securities margin trading in Shanghai Stock Exchange and Shenzhen Stock Exchange.These listed the underlying stocks come from the real estate industry and electrical equipment industry. On the basis of the daily closing price data since the early 2008 by the end of 2015,we get the threshold by calculating the average yield rate corresponding to different Pearson Value, which makes the deal’s overall performance better than the big board.We set the threshold as Pearson threshold, and then on the basis of it, stocks,conforming to matching conditions,are chosen to carry out the strategy operation.Based on 8 years of historical data, this strategy achieved almost-10.52% and33.20% average rate of return in simulation test.But the Shanghai Composite Index fell32.88% in this period. The results show that this pairs trading strategy is a market neutralinvestment strategy and it can obtains stable income in our country, which verified the feasibility of statistical arbitrage in Chinese capital market.