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

U.S.-SINGAPORE COMMODITY TRADE AND THE J-CURVE

Limited number of studies that investigated the short-run (J-Curve) and long-run effects of currency depreciation on the trade balance of Singapore either used aggregate trade data between Singapore and rest of the world...

DOES HIGHER EDUCATION REDUCE POVERTY AMONG YOUTHS IN NIGERIA?

Poverty is a serious problem in Nigeria with estimated 70.2 percent of Nigerians on less than 1$ daily. Poverty in Nigeria resembles a paradox, with her wealth; she still faces an enormous challenge in her effort to redu...

An Investigation of Small and Micro-Enterprise Owners’ Perceptions Towards Financial Credit Offered by Commercial Banks in the Cape Coast Metropolitan Area of Ghana

This paper reports on a study conducted by collecting data from both the demand and supply sides of formal finance to understand the perceptions of each party towards the other, regarding financial credit offered by comm...

POPULATION AGING, MARGINAL PROPENSITY TO CONSUME, AND ECONOMIC GROWTH

This paper explores the mechanism of population aging affecting economic growth by influencing marginal propensity to consume. We find that population aging has both a positive and a negative effect on economic growth. W...

PROSPECT OF E-BANKING IN BANGLADESH: NEW WAY TO MAKE BANKING ELECTRONIC

Being a developing country E-banking opened up tremendous opportunity to the financial sector and economic development of Bangladesh. This paper studies prospects of e-banking in Bangladesh, considering the performance o...

Download PDF file
  • EP ID EP2066
  • DOI -
  • Views 432
  • Downloads 48

How To Cite

Sharjil Muktafi Haque, A. K. Enamul Haque (2014). PAIRS TRADING STRATEGY IN DHAKA STOCK EXCHANGE: IMPLEMENTATION AND PROFITABILITY ANALYSIS. Asian Economic and Financial Review, 4(8), 1091-1105. https://europub.co.uk/articles/-A-2066