Designing Efficient Pair-Trading Strategies Using Cointegration for the Indian Stock Market
Abstract
A pair-trading strategy is an approach that utilizes the fluctuations between prices of a pair of stocks in a short-term time frame, while in the long-term the pair may exhibit a strong association and co-movement pattern. When the prices of the stocks exhibit significant divergence, the shares of the stock that gains in price are sold (a short strategy) while the shares of the other stock whose price falls are bought (a long strategy). This paper presents a cointegration-based approach that identifies stocks listed in the five sectors of the National Stock Exchange (NSE) of India for designing efficient pair-trading portfolios. Based on the stock prices from Jan 1, 2018, to Dec 31, 2020, the cointegrated stocks are identified and the pairs are formed. The pair-trading portfolios are evaluated on their annual returns for the year 2021. The results show that the pairs of stocks from the auto and the realty sectors, in general, yielded the highest returns among the five sectors studied in the work. However, two among the five pairs from the information technology (IT) sector are found to have yielded negative returns.
Keywords
Cite
@article{arxiv.2211.07080,
title = {Designing Efficient Pair-Trading Strategies Using Cointegration for the Indian Stock Market},
author = {Jaydip Sen},
journal= {arXiv preprint arXiv:2211.07080},
year = {2022}
}
Comments
The is the accepted version of the paper that was presented at the Second IEEE International Conference ASIANCON'22. The conference was organized in Pune, India, in August 2022. The paper is 8 pages long and it contains 5 tables and 33 figures. This is not the published version. The published version is copyright-protected by IEEE and has access-controlled