The purpose of the thesis aims to investigate pair trading strategies which are frequently used by hedge funds adopting non-directional strategies. It is also our intention to develop a set of streamlined operational guidelines for pair trading strategy to be implemented in the Taiwan securities markets.
Daily closing prices of listed stocks are used. The database is compiled by Taiwan Economic Journal, covering companies listed on the Taiwan Stock Exchange and the GreiTai Market in Taiwan. The company-pairs are selected from firms listed on the same market, conducting business in the same product field, and with sample correlation coefficient higher than 0.7. We choose 10 sample company-pairs covering 20 listed companies.
The trading strategies mix both divergence and convergence rules. For the former, when the price ratio of the pair exceeds the moving average price ratio plus (minus) 0.3 standard deviation, we buy the strong and short the weak to anticipate the price ratio trend continues. For the latter, when the price ratio goes beyond the moving average price ratio plus (minus) 1.7 standard deviations, we buy the weak and short the strong, anticipating the price ratio to go back to normal. The exit rules are based on absolute dollar profit, absolute dollar loss, and prolonged position period.
The research results show that the pair trading strategies are not risk-free. Risk arises
when the price ratio trend runs adversely than as expected. To control the risk, our
challenges lie in fine tuning the entry and exit rules. With larger sample size and more
in-depth investigation, we expect that the profit/loss ratio of the stragtegy can be
improved. Then the pair trading strategy will become a good alternative for
conservative individual investors seeking low risk investment opportunities to
participate in the securities markets in Taiwan.
| Identifer | oai:union.ndltd.org:NSYSU/oai:NSYSU:etd-0731107-170523 |
| Date | 31 July 2007 |
| Creators | ku, yi-chin |
| Contributors | none, none, none |
| Publisher | NSYSU |
| Source Sets | NSYSU Electronic Thesis and Dissertation Archive |
| Language | Cholon |
| Detected Language | English |
| Type | text |
| Format | application/pdf |
| Source | http://etd.lib.nsysu.edu.tw/ETD-db/ETD-search/view_etd?URN=etd-0731107-170523 |
| Rights | not_available, Copyright information available at source archive |
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