Tan, Lee Kwang.
Lim, Nelson Yao Kai.
Lee, Wen Kai.
Date of Issue2011
College of Business (Nanyang Business School)
In this research project, we examine the possibility of reaping excess profits by adopting the Pairs Trading strategy in the Singapore stock market, using historical data from January 2004 to March 2010. We derived a sample of 1,957 pairs which we subjected to 20 research and implementation periods, giving us a total of 39,140 experimental results. We draw reference from several studies on the Pairs Trading strategy conducted mostly in the American markets, including the first research done by Gatev, Goetzmann and Rouwenhorst (GGR). Additionally, we focus on a Singapore Exchange (SGX) case study of this strategy on UOB and OCBC stocks, and adapt the approaches taken in these previous studies to investigate the profitability of this strategy on all possible pairs identified and listed on SGX. Based on previous literature, we identify high research period correlation and similar industry sub-sector classifications as key criteria in pairs formation, with the aim of obtaining excess profits with the implementation of the strategy in the implementation period. We attempt to identify additional parameters which might serve as significant indicators of greater pairs trading profitability, and hypothesize that pairs correlation, total pairs volatility, and number of price reversals in the research period could serve to indicate higher probabilities of profitability should the strategy be employed in the subsequent implementation period. Additionally, we also compare profitability across industry sectors and different sets of trading periods to investigate instances of greater profitability, and adjust our results to examine the impact of trading costs on profitability.
Final Year Project (FYP)
Nanyang Technological University