Tokyo Stock Exchange Pairs Trading Across All Stock Pairs

Summary

This study evaluates an automated pairs trading method across stocks listed on the first section of the Tokyo Stock Exchange. It examines pairs of highly correlated stocks and tracks the spread between their prices. Three thresholds define when a position starts, when profits are taken, and when losses trigger a stop. The method uses first-passage behavior of the spread to guide those decisions.

The researchers apply the strategy to 1,784 stocks, covering 1,590,436 possible pairs, and report positive profit rates for most tested threshold combinations over data from 2010 to 2012. This is historical numerical evidence, not a guarantee of future results. The summary does not specify transaction costs, market impact, portfolio-level exposure controls, or how thresholds were chosen, so those factors limit what can be inferred about live performance.

Key ideas

• The strategy trades the spread between highly correlated stock pairs.
• Entry, profit-taking, and stop-loss thresholds define its trade decisions.
• The study applies the method to all possible pairs among 1,784 Tokyo Stock Exchange stocks.
• Most tested threshold combinations had positive historical profit rates over 2010–2012.
• The reported results do not establish performance after trading costs or in future markets.

Tags

# 1412.7269


# Large-scale empirical study on pairs trading for all possible pairs of stocks listed on the first section of the Tokyo Stock Exchange









We carry out a large-scale empirical data analysis to examine the efficiency of the so-called pairs trading. On the basis of relevant three thresholds, namely, starting, profit-taking, and stop-loss for the `first-passage process' of the spread (gap) between two highly-correlated stocks, we construct an effective strategy to make a trade via `active' stock-pairs automatically. The algorithm is applied to $1,784$ stocks listed on the first section of the Tokyo Stock Exchange leading up to totally $1,590,436$ pairs. We are numerically confirmed that the asset management by means of the pairs trading works effectively at least for the past three years (2010-2012) data sets in the sense that the profit rate becomes positive (totally positive arbitrage) in most cases of the possible combinations of thresholds corresponding to `absorbing boundaries' in the literature of first-passage processes.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.