China has established the policy of short selling and margin trading, which enables the pairs trading strategy to be a promising tool for financial investment. This study tries to formulate a two-stage pairs trading strategy based on cointegration method and distance estimation. In particular, the cointegration approach is applied to all possible pairs of stocks to check the potential cointegration relationship, and the distances of the pairs with cointegration relationship are measured to finally determine the optimal pairs with minimum distances. Furthermore, the optimal pairs portfolio is given weighted by cointegration coefficients under finite investment budget, considering short selling and margin trading. To verify the effectiveness of proposed approach, the Shanghai 50 Index stocks are used as study samples. Empirical results show that the novel two-stage model outperforms the benchmark model only considering cointegration relationship, in term of excess returns. Besides, the sensitivity analysis confirms the robustness of the model.
HU Lun-chao, YU Le-an, TANG Ling
. Pairs Trading Strategy Research Considering Short Selling and Margin Trading: A Two-Stage Approach Based on Cointegration and Distance Methods[J]. Chinese Journal of Management Science, 2016
, 24(4)
: 1
-9
.
DOI: 10.16381/j.cnki.issn1003-207x.2016.04.001
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