Pair Trading’s Research Application And Empirical Study In Stock Market Of China

Pair trading is a special statistical arbitrage strategy.Through selecting paired stock in the formation stage and tracking the open signal based on the spread signal in the trading stage,it constructs the long and short portfolio strategy,further earning the income from the spread convergence.Pair trading strategy is risk neutral and has little relevance to stock market.In the forming stage,this paper proposes distance-volatility method based on the traditional minimum distance method.In the trading stage,this paper adopts the optimized standard deviation method and then conducts empirical research on three industries of banking,real estate and non-bank finance.The results show that the pair trading’ sensitivity to parameters is verified.Compared with the traditional minimum distance method,the distancevolatility method is more stable in different parameter conditions and under the optimal parameter,the earning rate,winning rate of transactions and other statistics performs better than under the minimum distance method.Furthermore,this paper applies the idea of pair trading into the index enhancement strategy.By constructing the industry benchmark index and the enhancing index,it confirms that the strategy of index enhancement based on pair trading is adoptable.The index enhancement strategy is more suitable under certain market with annualized volatility level greater than 200 and industry index in the upstream market environment.