An Empirical Study On Pairs Trading Strategy Of China Futures Market

Pairs trading strategy is a market-neutral investment strategy developed by the quantitative analysis team from famous American investment bank Morgan Stanley in the 1980s combined with statistics,physics,mathematics,and computer science.Specifically,we first observe the historical market data and select two securities with similar price trends as a pair.Then we proceed to open and close positions according to the trend of the spread of the pair.When the spread of the pair is higher(lower)than the historical average,then we buy(sell)the higher-priced securities and sell(buy)the lower-priced securities at the same time.Till the spread returns to the long-term equilibrium,we close the positions.According to this strategy we make profit from changes in the spread of the two securities.However,China's stock market has always lacked a short-mechanism.Although China's stock market launched margin trading in 2010,high-cost short-selling still caused the pairs trading strategy to be difficult to achieve in China's financial markets.In the past three years,the transaction volume of China's commodity futures market has continued to grow steadily.And the products in the financial futures market have become increasingly abundant.The short-mechanism in the futures market has made the pairs trading strategy possible.Based on this,this paper mainly refers to the papers by Vidyamurthy(2004)、Gatev et al(2006)and Schmidt(2008),chooses the China's futures market as the research object,and conducts empirical analysis on the pairs trading strategy.Firstly,this paper comprehensively inspects more than 50 futures in China's futures market,selects the better-liquidity varieties as the paired securities pools.Then pairs them up to perform correlation analysis,and the correlation coefficient threshold is set to 0.85.Cointegration analysis was performed on the pairs whose correlation coefficient above this threshold.Finally,10 pairs with better cointegration were selected as the research objects for the back testing of pairs trading strategy.Calculating pairs'contract ratios for the selected pairs one by one,analyzing their spread sequence characteristics in detail,and formulating three trading strategy signals,this paper uses MultiCharts,a quantitative trading platform,to back test the selected pairs and the developed pairs trading strategy signals.By comparing the detailed equity curve and the maximum potential losses under each trading signal,and by constantly adjusting the parameters,the paper concludes that the selected 10 pairs can obtain good performance under the pairs trading strategy,and the gains obtained from the commodity future pairs are obviously better than that from the financial future pairs.From the pairs selected in this paper,we also found that there is not a good cointegration for futures pairs with a good fundamental correlation.On the contrary,for some pairs with weak fundamental correlations,there may be a good cointegration relationship.This conclusion challenges the traditional trading concept of relying on the fundamental selection pairs.It also provides a good method for how to select a matching trading pairs.Hope subsequent researchers can regard this as a reference,optimize and adjust the trading strategy signals,and apply this strategy to real trading.Thus driving China's futures pricing more reasonable,increasing revenue as well.Which will promote the healthy development of China's futures market.