Cross-Market Pairs Trading Between Mainland China and Hong Kong
Summary
The document summarizes research on pairs trading among liquid large- and mid-cap stocks in Mainland China and Hong Kong from 1996 to 2017. It compares strategies confined to each market with strategies that form pairs across the two markets, assessing performance after risk adjustment and trading costs. The reported results indicate that within-market pairs did not deliver significant abnormal returns, while cross-market pairs were profitable over the full sample.
Rolling-window regressions show that performance changed over time. Bootstrap analysis suggests the strategy’s decline in profitability after 2012 may reflect chance rather than a reduced ability to identify mispricing; most profitable periods were attributed to stock selection. The approach also performed better during prolonged market turbulence. These findings fit an adaptive view of market efficiency, but they describe historical results and depend on access to both markets, the selected stocks, and the study’s assumptions about costs and risk.
Key ideas
- Pairs trading confined to either Mainland China or Hong Kong did not produce significant abnormal returns in the summarized study.
- Pairs formed across the two markets were profitable after risk and trading cost adjustments over the full sample.
- Rolling-window results indicate that strategy profitability varied over time.
- Bootstrap analysis attributed the post-2012 decline in profitability to chance rather than weaker mispricing detection.
- The strategy tended to be more profitable during prolonged market turbulence.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.