scholarly journals Evaluation of dynamic cointegration-based pairs trading strategy in the cryptocurrency market

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Masood Tadi ◽  
Irina Kortchemski
Keyword(s):  
Trading Strategy ◽  
Significant Finding ◽  
Pairs Trading ◽  
Content Type ◽  
Arbitrage Opportunities ◽  
Cointegration Tests ◽  
Look Back ◽  
Trading Period ◽  
Asset Selection ◽  
Binned Data

Purpose This paper aims to demonstrate a dynamic cointegration-based pairs trading strategy, including an optimal look-back window framework in the cryptocurrency market and evaluate its return and risk by applying three different scenarios. Design/methodology/approach This study uses the Engle-Granger methodology, the Kapetanios-Snell-Shin test and the Johansen test as cointegration tests in different scenarios. This study calibrates the mean-reversion speed of the Ornstein-Uhlenbeck process to obtain the half-life used for the asset selection phase and look-back window estimation. Findings By considering the main limitations in the market microstructure, the strategy of this paper exceeds the naive buy-and-hold approach in the Bitmex exchange. Another significant finding is that this study implements a numerous collection of cryptocurrency coins to formulate the model’s spread, which improves the risk-adjusted profitability of the pairs trading strategy. Besides, the strategy’s maximum drawdown level is reasonably low, which makes it useful to be deployed. The results also indicate that a class of coins has better potential arbitrage opportunities than others. Originality/value This research has some noticeable advantages, making it stand out from similar studies in the cryptocurrency market. First is the accuracy of data in which minute-binned data create the signals in the formation period. Besides, to backtest the strategy during the trading period, this study simulates the trading signals using best bid/ask quotes and market trades. This study exclusively takes the order execution into account when the asset size is already available at its quoted price (with one or more period gaps after signal generation). This action makes the backtesting much more realistic.

Pairs Trading in Commodity Futures: Evidence from the Indian Market

2020 ◽  
pp. 363-371
Keyword(s):  
Trading Strategy ◽  
Indian Market ◽  
Pairs Trading ◽  
Distance Method ◽  
Statistical Arbitrage ◽  
Cointegration Tests ◽  
Trading Period ◽  
Expected Values ◽  
Two Stages ◽  
Selection Of

The pairs trading, one of the techniques of the statistical arbitrage, is a market-neutral trading strategy that employs time series methods to identify relative mispricing between securities based on the expected values of these assets. The main objective of this study was to investigate the profitability and risks of pairs trading based on the selection of pairs through minimising the sum of squared deviation (distance method) and the selection based on cointegration tests (cointegration method) using the future daily prices of commodities traded and listed on The Multi Commodity Exchange of India (MCX) over 2011-2017 on a rolling basis. The pairs trading strategy was performed in two stages: the formation period and the trading period. The strategy involved long position in one commodity and short position in other commodity of the pair identified. The study revealed that pairs trading in commodities were significantly profitable, with average annualised profitability of up to 59 percent, including transaction costs.

scholarly journals Do momentum and reversal strategies work in commodity futures? A comprehensive study

2020 ◽  
Vol 12 (4) ◽  
pp. 375-409 ◽  
Author(s):  
Hanxiong Zhang ◽  
Andrew Urquhart
Keyword(s):  
Futures Market ◽  
Trading Strategy ◽  
Commodity Futures ◽  
High Momentum ◽  
Pairs Trading ◽  
Momentum Strategy ◽  
Partial Explanation ◽  
Content Type ◽  
Momentum Profits ◽  
Significant Reversal

PurposeMotivated by the debate on the patterns and sources of commodity futures returns, this paper investigates the performance of three investment trading strategies, namely, the momentum strategy of Jegadeesh and Titman (1993), the 52-week high momentum strategy of George and Hwang (2004) and the pairs trading strategy of Gatev et al. (2006) in the commodity futures market.Design/methodology/approachThe three strategies are those given by Jegadeesh and Titman (1993), George and Hwang (2004) and Gatev et al. (2006), respectively.FindingsThe authors find that there is no significant reversal profit across 189 formation-holding windows for all the three strategies. However, there are statistical and economically significant momentum profits, and the profitability increases with the rising of formation-holding periods. Momentum returns are quite sensitive to market conditions but the crash of momentum returns is partly predictable. Return seasonality, risk and herding also provide partial explanation of the momentum profits.Originality/valueThe authors are the first to compare the performances of the pairs trading strategy of Gatev et al. (2006), the conventional momentum of Jegadeesh and Titman (1993), and the 52-week high momentum of George and Hwang (2004) under 189 formation-holding windows. Also, the authors are the first to investigate the association between herding behaviour and momentum returns in the commodity futures market.

Stock returns in Chinese markets and lucky numbered days

2015 ◽  
Vol 41 (9) ◽  
pp. 925-939 ◽  
Author(s):  
K. Stephen Haggard
Keyword(s):  
Stock Returns ◽  
Statistical Significance ◽  
Composite Index ◽  
Significant Risk ◽  
Trading Strategy ◽  
Stock Exchanges ◽  
Single Digit ◽  
Content Type ◽  
Arbitrage Opportunities ◽  
Chinese Markets

Purpose – The purpose of this paper is to examine the stock return impact of “lucky” numbered days in markets dominated by Chinese participants. The existence of such patterns might present arbitrage opportunities for investors who do not share a belief in the Chinese system of “lucky” numbers. Design/methodology/approach – In univariate and multivariate analyses, the author examines the statistical significance of return differences between “lucky” numbered days and other days. The author examines samples which only consider single digit days and months, and the author also considers samples based on the last digit of the day or month. Based on the findings in these tests, the author designs and tests a trading strategy on the Shenzhen Exchange that produces significant risk-adjusted returns in excess of the buy-and-hold return on the Shenzhen Composite Index. Findings – The author shows that “lucky” numbered dates impact stock returns in Chinese markets and demonstrate a “lucky” number date trading strategy for the Shenzhen market that produces risk-adjusted returns in excess of the market return. Originality/value – Prior research on home address numbers and stock trading codes shows that, in markets dominated by Chinese participants, assets with identifiers containing numbers defined by Feng Shui as “lucky” sell at a premium and assets with identifiers containing “unlucky” numbers sell at a discount. In such markets, prices are more likely to end in a “lucky” number than an “unlucky” number. Chinese firms also tend to price their shares at IPO using “lucky” numbers and avoiding “unlucky” numbers. The author extends this literature to examine whether dates containing “lucky” and “unlucky” numbers experience stock returns significantly different than other days on Chinese stock exchanges.

scholarly journals Price dynamics of cryptocurrencies in parallel markets: evidence from Bitcoin exchanges in Brazil

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Daniel Modenesi de Andrade ◽  
Fernando Barros Jr ◽  
Fabio Yoshio Motoki ◽  
Matheus Oliveira da Silva
Keyword(s):  
Price Discovery ◽  
Emerging Economy ◽  
Price Dynamics ◽  
Price Variation ◽  
Content Type ◽  
Price Series ◽  
Arbitrage Opportunities ◽  
Long Run ◽  
Cointegration Tests ◽  
Short Run

Purpose This paper aims to study the dynamics of bitcoin prices in Brazil, a large emerging economy with an unregulated bitcoin market. Design/methodology/approach First, this study tests if the Law of One Price (LOOP) is valid for bitcoin prices in Brazil, conducting tests with data from three Brazilian exchanges. Next, this study documents bitcoin price dynamics in the short run by studying the price discovery mechanism in these exchanges. This study uses Information Share and Component Share, combining the two measures to obtain an Information Leadership Share (ILS) measure. Findings This study finds a common trend within bitcoin prices among a set of exchanges, with cointegration tests between the price series indicating that LOOP is valid in Brazilian markets in the long run. ILS indicated that, for closing prices, the most liquid exchange (Foxbit) leads discovery, whereas the least liquid (Local Bitcoin) lags, with Mercado Bitcoin in the middle both in terms of discovery and liquidity. Finally, this study provides evidence that the price variation in the market that leads price discovery can be used to construct an arbitrage in another exchange. Originality/value This research brings the first evidence of a price discovery mechanism for exchanges in Brazilian Reais. Although LOOP is valid in the long run, price leadership in bitcoin markets potentially create arbitrage opportunities in the short run. This study contributes to the growing literature of bitcoin prices with novel evidence from a large emerging economy.

scholarly journals Market-neutral trading with fuzzy inference, a new method for the pairs trading strategy

2019 ◽  
Vol 30 (4) ◽  
pp. 411-421
Author(s):  
Mehmet Bayram ◽  
Muzaffer Akat
Keyword(s):  
Decision Making ◽  
Fuzzy Logic ◽  
Fuzzy Inference ◽  
Trading Strategy ◽  
Pairs Trading ◽  
Inference Model ◽  
Relative Pricing ◽  
Arbitrage Opportunities ◽  
Human Decision ◽  
Arbitrage Strategy

Financial pricing and prediction of stock markets is a specific and relatively narrow field, which have been mainly explored by mathematicians, economists and financial engineers. Prediction with the purpose of making profits in a martingale domain is a hard task. Pairs trading, a market neutral arbitrage strategy, attempts to resolve the drawback of unpredictability and yield market independent returns using relative pricing idea. If two securities have similar characteristics, so should their prices. Deviation from the acceptable similarity range in prices is considered an anomaly, and whenever noticed, trading is executed assuming the anomaly will correct itself.This work proposes a fuzzy inference model for the market-neutral pairs trading strategy. Fuzzy logic lets mimicking human decision-making in a complex trading environment and taking advantage of arbitrage opportunities that the crisp models may miss to acquire for the trade decision-making. Spread between two co-integrated stocks and volatility of the spread is used as decision-making inputs. Spread is a measure of the distance between two stocks and volatility is an indicator of how soon the spread would disappear. We conclude that fuzzy engine contributes to the profitability and efficiency of pairs trading type of strategies.

On the sensibility of the Pairs Trading strategy: the case of the FTS stock market index

2020 ◽  
Vol 38 (3) ◽  
Author(s):  
Ainhoa Fernández-Pérez ◽  
María de las Nieves López-García ◽  
José Pedro Ramos Requena
Keyword(s):  
Standard Deviation ◽  
Stock Market ◽  
Trading Strategy ◽  
Stock Market Index ◽  
Pairs Trading ◽  
Empirical Application ◽  
Statistical Arbitrage ◽  
Market Index ◽  
Standard Deviations ◽  
Using Data

In this paper we present a non-conventional statistical arbitrage technique based in varying the number of standard deviations used to carry the trading strategy. We will show how values of 1 and 1,2 in the standard deviation provide better results that the classic strategy of Gatev et al (2006). An empirical application is performance using data of the FST100 index during the period 2010 to June 2019.

scholarly journals Options trading strategy based on ARIMA forecasting

2020 ◽  
Vol 4 (2) ◽  
pp. 111-127
Author(s):  
Pierre Rostan ◽  
Alexandra Rostan ◽  
Mohammad Nurunnabi
Keyword(s):  
Composite Index ◽  
Garch Model ◽  
Trading Strategy ◽  
Credit Crisis ◽  
Strike Price ◽  
Index Options ◽  
Content Type ◽  
Option Trading ◽  
Auto Regressive ◽  
Options Trading

Purpose The purpose of this paper is to illustrate a profitable and original index options trading strategy. Design/methodology/approach The methodology is based on auto regressive integrated moving average (ARIMA) forecasting of the S&P 500 index and the strategy is tested on a large database of S&P 500 Composite index options and benchmarked to the generalized auto regressive conditional heteroscedastic (GARCH) model. The forecasts validate a set of criteria as follows: the first criterion checks if the forecasted index is greater or lower than the option strike price and the second criterion if the option premium is underpriced or overpriced. A buy or sell and hold strategy is finally implemented. Findings The paper demonstrates the valuable contribution of this option trading strategy when trading call and put index options. It especially demonstrates that the ARIMA forecasting method is a valid method for forecasting the S&P 500 Composite index and is superior to the GARCH model in the context of an application to index options trading. Originality/value The strategy was applied in the aftermath of the 2008 credit crisis over 60 months when the volatility index (VIX) was experiencing a downtrend. The strategy was successful with puts and calls traded on the USA market. The strategy may have a different outcome in a different economic and regional context.

The impact of labor freedom on geographic cost of living differentials

2017 ◽  
Vol 6 (3) ◽  
pp. 385-395
Author(s):  
Richard Cebula ◽  
James E. Payne ◽  
Donnie Horner ◽  
Robert Boylan
Keyword(s):  
Labor Market ◽  
State Level ◽  
The State ◽  
Annual Data ◽  
Significant Finding ◽  
Cost Of Living ◽  
Content Type ◽  
The Usa ◽  
The Cost ◽  
The Impact

Purpose The purpose of this paper is to examine the impact of labor market freedom on state-level cost of living differentials in the USA using cross-sectional data for 2016 after allowing for the impacts of economic and quality of life factors. Design/methodology/approach The study uses two-stage least squares estimation controlling for factors contributing to cost of living differences across states. Findings The results reveal that an increase in labor market freedom reduces the overall cost of living. Research limitations/implications The study can be extended using panel data and alternative measures of labor market freedom. Practical implications In general, the finding that less intrusive government and greater labor freedom are associated with a reduced cost of living should not be surprising. This is because less government intrusion and greater labor freedom both inherently allow markets to be more efficient in the rationalization of and interplay with forces of supply and demand. Social implications The findings of this and future related studies could prove very useful to policy makers and entrepreneurs, as well as small business owners and public corporations of all sizes – particularly those considering either location in, relocation to, or expansion into other markets within the USA. Furthermore, the potential benefits of the National Right-to-Work Law currently under consideration in Congress could add cost of living reductions to the debate. Originality/value The authors extend the literature on cost of living differentials by investigating whether higher amounts of state-level labor market freedom act to reduce the states’ cost of living using the most recent annual data available (2016). That labor freedom has a systemic efficiency impact on the state-level cost of living is a significant finding. In our opinion, it is likely that labor market freedom is increasing the efficiency of labor market transactions in the production and distribution of goods and services, and acts to reduce the cost of living in states. In addition, unlike previous related studies, the authors investigate the impact of not only overall labor market freedom on the state-level cost of living, but also how the three sub-indices of labor market freedom, as identified and measured by Stansel et al. (2014, 2015), impact the cost of living state by state.

Sign in / Sign up

Export Citation Format

Share Document