PAIRS TRADING STRATEGY IN DHAKA STOCK EXCHANGE: IMPLEMENTATION AND PROFITABILITY ANALYSIS
Journal Title: Asian Economic and Financial Review - Year 2014, Vol 4, Issue 8
Abstract
The objective of this study is to develop a financially profitable Pairs trading model for trading in Dhaka Stock Exchange. Pairs Trade is a statistical arbitrage investment strategy. The study used daily stock prices of a sample of 20 stocks listed in Dhaka Stock Exchange. The research first identified a pair of stocks whose prices have a long-run equilibrium using Johansen?s test for cointegration. The cointegrated stock pair is then modeled using a Vector Error Correction Model. The residual obtained from the estimated model serves as the guide to implementing Pairs Trading Strategy. The research finally identified three pairs of stocks which have general long-run equilibriums. Based on the residual series of these pairs, we implemented pairs trading strategy for a period of one to two months using real time data but doing hypothetical trading. It generated significant returns for all trades carried out using both in-sample and out-of-sample data. Given that Bangladesh stock market is frequently subjected to unprecedented volatility, a market-neutral investment strategy like Pairs Trading can be a valuable option to retail and institutional investors. We recommend undertaking policy initiatives required to allow investors to utilize this strategy in Bangladesh.
Authors and Affiliations
Sharjil Muktafi Haque| Department of Economics, East West University, Dhaka, Bangladesh, A. K. Enamul Haque| Department of Economics, East West University, Dhaka, Bangladesh
Keywords
Related Articles
- EP ID EP2066
- DOI -
- Views 402
- Downloads 48
SAUDI ARABIAN COMMERCIAL BANKS’ MARKET-RISK SENSITIVITY: A VIEW THROUGH ROLLING SUB- SAMPLES
Using data collected from the Saudi Arabian TadawulStock Exchange, this paper analyses 11 publically listed bank risk-return relationships during 2008-2011. The contribution of this paper provides a more refined techniq...
THE ROLE OF PRODUCTIVITY IN ECONOMIC GROWTH AND EQUILIBRIUM
This study reexamines the evidence for the Balassa-Samuelson effect for the 1985-2007 period. Cointegrating relationships between the real exchange rate and productivity, real price of oil and government spending a...
THE EFFECT OF ECONOMIC FACTORS ON MENTAL DISORDER RESULTING TO CRIME
Nowadays, social criteria such as economic situation, educational degree, and marital status and so on play a significant role in individual development and growth in community. Lack of such parameters provides backgroun...
DETERMINANTS OF SAVINGS AND CAPITAL FORMATION AMONG RURAL FARMERS IN ISOKO NORTH LOCAL GOVERNMENT AREA OF DELTA STATE, NIGERIA
This study examined the determinants of savings and capital accumulation in Isoko north local government area of Delta state, Nigeria. It specifically sought to identify the socioeconomic/demographic variables of the rur...
A COINTEGRATION TEST FOR TURKISH FOREIGN EXCHANGE MARKET EFFICIENCY
This study examines the within-country market efficiency of the Turkish foreign exchange markets on the basis of the forward rate unbiasedness hypothesis, in case of the Turkish lira/US dollar and the Turkish lira/Euro f...