Test on the Profit of Pairs Trading Strategy Using KOSPI200 Regular and Mini Options

2018 ◽  
Vol 26 (1) ◽  
pp. 115-151
Author(s):  
Woo–baik Lee
Keyword(s):  
The Other ◽  
Sample Period ◽  
Options Market ◽  
Pairs Trading ◽  
Elapsed Time ◽  
High Profit ◽  
Arbitrage Opportunities ◽  
Arbitrage Trading ◽  
Arbitrage Opportunity ◽  
Price Spread

The KOSPI200 mini option introduced in July 2015 is the derivative of which trading multiplier is reduced to one-fifth of the regular options. This study explored the pairs trading opportunities arising from the price spread between the KOSPI200 regular options and the mini options during the sample period from August 2015 to March 2016 and measured the profits of pairs trading. The main results are summarized as follows. First, the most frequency of pairs trading with high profit was observed for in-the-money options. On the other hands, the frequency of pairs trading opportunities is low and the profit is relatively small for out-of (at)-the money options. Second, for in-the-money options, arbitrage opportunities were captured every three minutes on an average, but the elapsed time between arbitrage opportunity opportunities on out-of-the money options exceeded 10 minutes on average. Third, pairs trading opportunities occur uniformly throughout the day, but profit tends to increase in the afternoon than in the morning. This indicates that price efficiency in options market deteriorates and profit of arbitrage trading with price disparity is higher in the afternoon than that of the morning trading. In addition, the profitability of pairs trading with low liquidity was cross-sectionally higher than those with high liquidity.

scholarly journals No-Arbitrage Principle in Conic Finance

2020 ◽  
Author(s):  
Mehdi Vazifedan ◽  
Qiji Jim Zhu
Keyword(s):  
Cash Flow ◽  
Financial Models ◽  
Unit Vector ◽  
Martingale Measure ◽  
Financial Model ◽  
No Arbitrage ◽  
Arbitrage Opportunities ◽  
Equivalent Martingale ◽  
Arbitrage Opportunity ◽  
Price Spread

In a one price economy, the Fundamental Theorem of Asset Pricing (FTAP) establishes that no-arbitrage is equivalent to the existence of an equivalent martingale measure. Such an equivalent measure can be derived as the normal unit vector of the hyperplane that separates the attainable gain subspace and the convex cone representing arbitrage opportunities. However, in two-price financial models (where there is a bid-ask price spread), the set of attainable gains is not a subspace anymore. We use convex optimization, and the conic property of this region to characterize the “No-Arbitrage” principle in financial models with the bid-ask price spread present. This characterization will lead us to the generation of a set of price factor random variables. Under such a set, we can find the lower and upper bounds (supper-hedging and sub-hedging bounds) for the price of any future cash flow. We will show that for any given cash flow, for which the price is outside the above range, we can build a trading strategy that provides one with an arbitrage opportunity. We will generalize this structure to any two-price finite-period financial model.

Theory and Evidence of Arbitrage Trading of Equity Futures

2010 ◽  
Vol 18 (4) ◽  
pp. 69-108
Author(s):  
Jin Yoo ◽  
Geun Beom Kim
Keyword(s):  
Stock Market ◽  
Futures Market ◽  
Futures Contracts ◽  
Spot Price ◽  
Market Participants ◽  
Arbitrage Opportunities ◽  
Time Period ◽  
Arbitrage Trading ◽  
Arbitrage Opportunity ◽  
First Time

The equity futures market was opened in May 6th, 2008 for the first time in Korea but nonetheless it has rarely been researched since. In this paper, we examine whether the market, combined with the stock market, its underlying market, has been offering any arbitrage opportunities to market participants for the period of May 6th, 2008 to March 11, 2010, focusing on the two futures contracts of Samsung Electronics and Hyundai Motors, the two most actively traded ones. Our findings are as follows. First, there have been arbitrage opportunities for the two futures in either direction. Second, the average time period for an arbitrage opportunity was two seconds so arbitrage transactions were feasible indeed. Third, nevertheless, some arbitrage transactions ended up with a loss because the estimated spot price at maturity to carry out an arbitrage trading turned out to be significantly different from the realized one. The discrepancy in these two prices causes a seemingly very safe arbitrage trading a risky one. This risky feature of an arbitrage trading has never been addressed in depth in a paper or a book before, and is a major contribution of this paper.

scholarly journals No-Arbitrage Principle in Conic Finance

Risks ◽  
2020 ◽  
Vol 8 (2) ◽  
pp. 66
Author(s):  
Mehdi Vazifedan ◽  
Qiji Jim Zhu
Keyword(s):  
Cash Flow ◽  
Financial Models ◽  
Unit Vector ◽  
Martingale Measure ◽  
Financial Model ◽  
No Arbitrage ◽  
Arbitrage Opportunities ◽  
Equivalent Martingale ◽  
Arbitrage Opportunity ◽  
Price Spread

In a one price economy, the Fundamental Theorem of Asset Pricing (FTAP) establishes that no-arbitrage is equivalent to the existence of an equivalent martingale measure. Such an equivalent measure can be derived as the normal unit vector of the hyperplane that separates the attainable gain subspace and the convex cone representing arbitrage opportunities. However, in two-price financial models (where there is a bid–ask price spread), the set of attainable gains is not a subspace anymore. We use convex optimization, and the conic property of this region to characterize the “no-arbitrage” principle in financial models with the bid–ask price spread present. This characterization will lead us to the generation of a set of price factor random variables. Under such a set, we can find the lower and upper bounds (supper-hedging and sub-hedging bounds) for the price of any future cash flow. We will show that for any given cash flow, for which the price is outside the above range, we can build a trading strategy that provides one with an arbitrage opportunity. We will generalize this structure to any two-price finite-period financial model.

Pairs Trading In The index Options Market

2021 ◽  
Author(s):  
Marianna Brunetti ◽  
Roberta De Luca
Keyword(s):  
Options Market ◽  
Pairs Trading ◽  
Index Options

scholarly journals Correlation of stock market returns in the West African region from 2008 to 2016

2019 ◽  
Vol 16 (3) ◽  
pp. 120-130 ◽  
Author(s):  
Eseosa Obadiaru ◽  
Alex Omankhanlen ◽  
Barnabas Obasaju ◽  
Henry Inegbedion
Keyword(s):  
United States ◽  
United Kingdom ◽  
Stock Market ◽  
United States Of America ◽  
Composite Index ◽  
The United States ◽  
The Other ◽  
Sample Period ◽  
Entire Sample ◽  
Stock Market Returns

Stock markets over the world have become more interconnected due to activities of foreign investors in search for alternative financial assets and markets to invest in order to diversify their portfolio. Stock market indices and index returns have been known to reflect linkages between different markets. This study assesses the extent of correlation of stock market index returns in West Africa and those of the United States of America (US) and United Kingdom (UK) from 2008 to 2016. The correlation between the index returns for the entire sample period and yearly samples were considered for Nigeria, Ghana, the BRVM, the USA and the UK. The indices selected for the five countries considered are the Nigerian All-Share Index, Ghanaian Composite Index, the BRVM Composite Index, the Financial Times 100 Index and the Standards and Poor’s 500 Index. Daily index returns data were used for the study and analyzed using correlation and multiple regression analysis. Findings revealed that the returns of the pairs of the United States of America (US) and the United Kingdom (UK) exhibited stronger positive correlation with each other than the other market pairs in the study both in the entire sample period and the yearly sub-period analysis. The correlations between the other market pairs were either positively or negatively weak or very weak indicating more diversification opportunities.

scholarly journals Spot Market Mechanism Design for the Electricity Market in China Considering the Impact of a Contract Market

Energies ◽  
2019 ◽  
Vol 12 (6) ◽  
pp. 1064 ◽  
Author(s):  
Chen Zhang ◽  
Wei Yan
Keyword(s):  
Electricity Market ◽  
Cost Minimization ◽  
Incentive Compatibility ◽  
Spot Market ◽  
Market Mechanism ◽  
Decomposition Algorithm ◽  
No Arbitrage ◽  
Arbitrage Opportunities ◽  
Arbitrage Opportunity ◽  
The Impact

To promote the reformation of the electricity market in China, a market mechanism that can support collaboration between the contract market and the upcoming spot market was designed in this paper. The focus of this paper was to develop a mechanism to institutionally stabilize the market by way of disciplining market power abuse through limiting arbitrage opportunities generated from multi-markets. To quantitatively describe the arbitrage opportunity, the arbitrage opportunity function (AOF) was defined. Based on inferences of the no-arbitrage principle and the AOF, a cost-based decomposition algorithm for contracts that could improve contract coverage was proposed. The incentive compatible settlement rule for the uncovered generation on the spot market was designed to properly manipulate the arbitrage opportunity. The decomposition algorithm and the settlement rule constituted the designed market mechanism. To verify the applicability and effectiveness of the proposed mechanism, the principles of incentive compatibility, individual rationality, and payment cost minimization were employed to test the designed market mechanism based on the concept of dominant policy equilibrium. This test was conducted on a fictitious case based on the IEEE-14 system. The analysis and results may provide valuable insights on market design in China based on the functional correlation between the contract market and the spot market.

Comparison of Variable Coded Symbology to a Conventional Tactical Situation Display Method

1996 ◽  
Vol 40 (23) ◽  
pp. 1174-1178 ◽  
Author(s):  
William A. Nugent
Keyword(s):  
Visual Search ◽  
Performance Measures ◽  
The Other ◽  
Sea Surface ◽  
Search Performance ◽  
Elapsed Time ◽  
Display Performance ◽  
Correct Target ◽  
Practical Implications ◽  
First Session

Visual search performance was compared using three variable coded symbology (VCS) methods, which included a mixture of symbol colors and/or shapes on the same tactical situation display, to a single color-coded tactical symbol set. Six participants completed two replications of 12 trials using each method on a combined total of 336 targets. Half the sample viewed visually prominent air targets in VCS methods administered in the first session, with sea surface targets prominent in VCS methods in the second session; the converse for the other half. Performance measures included throughput-an estimate of correct target hits per working minute, and elapsed time to enter selected targets into an on-screen list box. Superior throughput was demonstrated for a VCS method that combined three symbol coding levels on the same display. Performance was generally poorest for a VCS method combining color and monochrome formats within the same symbol set. Practical implications of these findings are discussed.

Pairs Trading with Opportunity Cost

2014 ◽  
Vol 51 (01) ◽  
pp. 282-286 ◽  
Author(s):  
Carl Lindberg
Keyword(s):  
Opportunity Cost ◽  
Trading Strategy ◽  
The Other ◽  
Recent History ◽  
Investment Opportunity ◽  
Financial Industry ◽  
Pairs Trading ◽  
Uhlenbeck Process ◽  
Optimal Liquidation ◽  
Ornstein Uhlenbeck Process

Pairs trading is a trading strategy which is used very frequently in the financial industry. An investment opportunity arises when the spread between two assets, which historically have exhibited autoregressive behavior, deviates from its recent history. In this case, the investor takes a long position in the asset which is expected to outperform going forward and finances this by taking a short position in the other one. If the spread converges, the investor can close both positions to generate a profit. We model the spread between two assets as an Ornstein-Uhlenbeck process and assume a constant opportunity cost. We then study the optimal liquidation strategy for an investor who wants to optimize profit in excess of the opportunity cost. Including this cost is important from an applied perspective, as the performance of any investment is always evaluated relative to the performance of the opportunity set.

scholarly journals OPTIMAL MEAN REVERSION TRADING WITH TRANSACTION COSTS AND STOP-LOSS EXIT

2015 ◽  
Vol 18 (03) ◽  
pp. 1550020 ◽  
Author(s):  
TIM LEUNG ◽  
XIN LI
Keyword(s):  
Transaction Costs ◽  
Optimal Timing ◽  
Model Parameters ◽  
Pairs Trading ◽  
Maximum Loss ◽  
Industry Practice ◽  
Stop Loss ◽  
Timing Strategies ◽  
Price Spread ◽  
Loss Level

Motivated by the industry practice of pairs trading, we study the optimal timing strategies for trading a mean-reverting price spread. An optimal double stopping problem is formulated to analyze the timing to start and subsequently liquidate the position subject to transaction costs. Modeling the price spread by an Ornstein–Uhlenbeck process, we apply a probabilistic methodology and rigorously derive the optimal price intervals for market entry and exit. As an extension, we incorporate a stop-loss constraint to limit the maximum loss. We show that the entry region is characterized by a bounded price interval that lies strictly above the stop-loss level. As for the exit timing, a higher stop-loss level always implies a lower optimal take-profit level. Both analytical and numerical results are provided to illustrate the dependence of timing strategies on model parameters such as transaction costs and stop-loss level.

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