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

Mitsuaki Murota; Jun-ichi Inoue

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arXiv · 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

Mitsuaki Murota·Jun-ichi Inoue

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Abstract

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.

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Mitsuaki Murota, Jun-ichi Inoue. 2014-12-23. Large-scale empirical study on pairs trading for all possible pairs of stocks listed on the first section of the Tokyo Stock Exchange. https://arxiv.org/abs/1412.7269

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