2017 Volume 10 Pages 22-49
Pairs trading is an investment strategy that seeks profitability by analyzing past price movements of two stocks. This paper extends the stochastic spread method-based pairs trading approach as described in Elliott et al. (2005) and then suggests pairs trading that employ the technical indicator “moving-average spread ratio.” More specifically, this paper shows creation of pairs trading by applying the 25-day Moving Average Spread Ratio to the AR (1) model and picking up stock price pairs with faster mean reversion speed from TOPIX Core30 shares. The author's empirical analysis has revealed that pairs trading based on the aforementioned technical analysis gives a better return than the pairs trading as suggested in Gatev et al. (2006) and TOPIX Core30 Dividend Index during the analysis period from January 2002 to June 2016. Because this outcome incorporates trading costs and some other factors, it represents contrary evidence against weak-form market efficiency.
