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Article
Publication date: 9 May 2016

Ioannis Papantonis

The purpose of this paper is to present an alternative approach to equity trading that is based on cointegration. If there are long-run equilibria among financial assets, a…

Abstract

Purpose

The purpose of this paper is to present an alternative approach to equity trading that is based on cointegration. If there are long-run equilibria among financial assets, a cointegration-based trading strategy can exploit profitable opportunities by capturing mean-reverting short-run deviations.

Design/methodology/approach

First, the author introduces an equity indexing technique to form cointegration tracking portfolios that are able to replicate an index effectively. The author later enhances this tracking methodology in order to construct more complex portfolio-trading strategies that can be approximately market neutral. The author monitors the performance of a wide range of trading strategies under different specifications, and conducts an in-depth sensitivity analysis of the factors that affect the optimal portfolio construction. Several statistical-arbitrage tests are also carried out in order to examine whether the profitability of the cointegration-based trading strategies could indicate a market inefficiency.

Findings

The author shows that under certain parameter specifications, an efficient tracking portfolio is able to produce similar patterns in terms of returns and volatility with the market. The author also finds that a successful long-short strategy of two cointegration portfolios can yield an annualized return of more than 8 percent, outperforming the benchmark and also demonstrating insignificant correlation with the market. Even though some cointegration-based pairs-trading strategies can consistently generate significant cumulative profits, yet they do not seem to converge to risk-less arbitrages, and thus the hypothesis of market efficiency cannot be rejected.

Originality/value

The primary contribution of the research lies within the detailed analysis of the factors that affect the tracking-portfolio performance, thus revealing the optimal conditions that can lead to enhanced returns. Results indicate that cointegration can provide the means to successfully reproducing the risk-return profile of a benchmark and to implementing market-neutral strategies with consistent profitability. By testing for statistical arbitrage, the author also provides new evidence regarding the connection between the profit accumulation of cointegration-based pairs-trading strategies and market efficiency.

Article
Publication date: 9 May 2008

M. Imtiaz Mazumder, Edward M. Miller and Atsuyuki Naka

The purpose of this paper is to examine the predictability of the US‐based international mutual fund returns by investigating 2,479 daily observations for all categories of…

Abstract

Purpose

The purpose of this paper is to examine the predictability of the US‐based international mutual fund returns by investigating 2,479 daily observations for all categories of international equity, bond and hybrid mutual funds. Further, trading strategies are proposed and tested under different scenario including a proposed regulation by the Security and Exchange Commission (SEC).

Design/methodology/approach

The sample is split and the initial sub sample is used to investigate return patterns of international funds and to develop trading rules based on the predictable return patterns. Trading rules are then tested on the holdout sample.

Findings

Empirical results demonstrate statistically significant predictabilities. Various trading strategies show that the returns of both load and no‐load funds are economically significant beating a buy‐and‐hold strategy. Empirical findings are consistent across the fund categories irrespective of sizes and styles. The tested strategies are profitable even with various limits on frequency of trading, minimum holding periods and even under a recent SEC's proposed regulation. Further, possible contracting and regulatory changes are proposed to improve the efficiency in the mutual fund industry.

Originality/value

The results confirm previous findings of statistically and economically significant regularities from trading strategies that involve following the US markets. A test of SEC's proposed regulation documents that short‐term investors may benefit from active trading strategy even if the SEC's rule is implemented.

Details

Journal of Financial Regulation and Compliance, vol. 16 no. 2
Type: Research Article
ISSN: 1358-1988

Keywords

Article
Publication date: 19 August 2009

Massoud Metghalchi, Jianjun Du and Yixi Ning

This paper tests two moving average technical trading rules for four Asian markets. Our results indicate that moving average rules do indeed have predictive power and can discern…

Abstract

This paper tests two moving average technical trading rules for four Asian markets. Our results indicate that moving average rules do indeed have predictive power and can discern recurring price patterns for profitable trading. Moreover, our results support the hypothesis that technical trading rules can outperform the buy‐and‐hold strategy. Break‐even one‐way trading costs are estimated to be high for all four markets. To confirm the test outcome, robust tests based on bootstrap and the related t‐tests among the markets are also carried out. We conclude from the statistical results that moving average rules are valid and indeed have predictive power. It is implied that the trading rules may be used to design a trading strategy that will beat the buy‐and‐hold strategy in the Hong Kong, Singapore, South Korea, and Taiwan markets. The contribution of the current study is that this is the first validation test of trading rules using four markets at a similar development stage and culture tradition; and in the tests, we use most current and longer periods than the periods used in previous literature. Our robust tests are unique and considered distribution‐free.

Details

Multinational Business Review, vol. 17 no. 3
Type: Research Article
ISSN: 1525-383X

Keywords

Open Access
Article
Publication date: 11 July 2023

Yunsung Eom and Mincheol Woo

As of May 2022, the National Pension Service of Korea is the world's third-largest pension fund, with assets worth KRW912tn (approximately $US800bn). Of the KRW152tn…

Abstract

As of May 2022, the National Pension Service of Korea is the world's third-largest pension fund, with assets worth KRW912tn (approximately $US800bn). Of the KRW152tn (approximately $US133bn) invested in domestic equities, 45% is outsourced to external asset managers. Given the absence of prior research on the National Pension Service's (NPS's) management method, this study analyzes its trading strategies and market impact according to the fund management method from 2005 to 2022. The results are as follows: First, the stock characteristics selected by internal management using passive strategies are different from those selected by external management, in which various strategies are combined. Second, the contrarian investment strategy, which acts as a market stabilizer, is a characteristic of the external management trading pattern, while internal management increases volatility and does not improve liquidity. Third, there has been a change in the internal management strategy since 2016, when the fund management headquarters was relocated. This study is practically significant and distinctive in that it confirms the differences between the NPS's two investment methods in terms of trading strategies and market impact.

Details

Journal of Derivatives and Quantitative Studies: 선물연구, vol. 31 no. 3
Type: Research Article
ISSN: 1229-988X

Keywords

Article
Publication date: 15 July 2021

Masood Tadi and Irina Kortchemski

This paper aims to demonstrate a dynamic cointegration-based pairs trading strategy, including an optimal look-back window framework in the cryptocurrency market and evaluate its…

Abstract

Purpose

This paper aims to demonstrate a dynamic cointegration-based pairs trading strategy, including an optimal look-back window framework in the cryptocurrency market and evaluate its return and risk by applying three different scenarios.

Design/methodology/approach

This study uses the Engle-Granger methodology, the Kapetanios-Snell-Shin test and the Johansen test as cointegration tests in different scenarios. This study calibrates the mean-reversion speed of the Ornstein-Uhlenbeck process to obtain the half-life used for the asset selection phase and look-back window estimation.

Findings

By considering the main limitations in the market microstructure, the strategy of this paper exceeds the naive buy-and-hold approach in the Bitmex exchange. Another significant finding is that this study implements a numerous collection of cryptocurrency coins to formulate the model’s spread, which improves the risk-adjusted profitability of the pairs trading strategy. Besides, the strategy’s maximum drawdown level is reasonably low, which makes it useful to be deployed. The results also indicate that a class of coins has better potential arbitrage opportunities than others.

Originality/value

This research has some noticeable advantages, making it stand out from similar studies in the cryptocurrency market. First is the accuracy of data in which minute-binned data create the signals in the formation period. Besides, to backtest the strategy during the trading period, this study simulates the trading signals using best bid/ask quotes and market trades. This study exclusively takes the order execution into account when the asset size is already available at its quoted price (with one or more period gaps after signal generation). This action makes the backtesting much more realistic.

Details

Studies in Economics and Finance, vol. 38 no. 5
Type: Research Article
ISSN: 1086-7376

Keywords

Article
Publication date: 25 February 2014

Eddie Hui, Philip Yam, John Wright and Kevin Chan

The purpose of this study is to verify whether the trading strategy can beat the “buy-and-hold” strategy for the securitized real estate indices of six Asian economies: Hong Kong…

1489

Abstract

Purpose

The purpose of this study is to verify whether the trading strategy can beat the “buy-and-hold” strategy for the securitized real estate indices of six Asian economies: Hong Kong, China, Japan, Taiwan, Thailand and Malaysia.

Design/methodology/approach

This paper constructs a trading strategy from the Shiryaev-Zhou index and tests the strategy on the securitized real estate indices of six emerging Asian economies: Hong Kong, China, Japan, Taiwan, Thailand and Malaysia. The authors compare the resulting profits from using the trading strategy with the resulting profits from using the “buy-and-hold” strategy. The authors consider three cases: no transaction costs, 0.1 percent transaction costs, and 0.2 percent transaction costs.

Findings

The results show that the trading strategy the authors constructed generally outperforms the “buy-and-hold” strategy even in the presence of transaction costs. In particular, the authors have a new finding as follows: Thailand and Malaysia's securitized real estate indices fell drastically during the period of observation. However, applying the trading strategy to these two securitized real estate indices can still earn a profit.

Practical implications

The trading strategy is particularly useful in protecting investors from huge loss in adverse market conditions. The results can be applied to the field of finance/investment that investors can construct a trading strategy similar to the authors to earn more profits.

Originality/value

This study will consider cases where both buying and selling costs exist, so the scenario is more like stock transactions in real-life equity markets. Furthermore, in this paper, for each securitized real estate index, the authors plot a graph to show the holding and non-holding periods under the trading strategy. This would help the authors explain the resulting profit under the trading strategy. This kind of graphical analysis was neglected by Hui and Yam.

Details

Journal of Property Investment & Finance, vol. 32 no. 2
Type: Research Article
ISSN: 1463-578X

Keywords

Book part
Publication date: 1 January 2004

Tina Yu, Shu-Heng Chen and Tzu-Wen Kuo

We model international short-term capital flow by identifying technical trading rules in short-term capital markets using Genetic Programming (GP). The simulation results suggest…

Abstract

We model international short-term capital flow by identifying technical trading rules in short-term capital markets using Genetic Programming (GP). The simulation results suggest that the international short-term markets was quite efficient during the period of 1997–2002, with most GP generated trading strategies recommending buy-and-hold on one or two assets. The out-of-sample performance of GP trading strategies varies from year to year. However, many of the strategies are able to forecast Taiwan stock market down time and avoid making futile investment. Investigation of Automatically Defined Functions shows that they do not give advantages or disadvantages to the GP results.

Details

Applications of Artificial Intelligence in Finance and Economics
Type: Book
ISBN: 978-1-84950-303-7

Article
Publication date: 1 October 2019

Jang Hyung Cho, Robert Daigler, YoungHa Ki and Janis Zaima

The purpose of this paper is to assess trading strategies adopted by each large trader group and examine their effects on the volatility in the interest rate futures markets.

Abstract

Purpose

The purpose of this paper is to assess trading strategies adopted by each large trader group and examine their effects on the volatility in the interest rate futures markets.

Design/methodology/approach

The Grinblatt et al.'s (1995) measure of momentum strategy is used to estimate the degree momentum and contrarian strategies. Then, regression analysis is used to determine the effects of trading strategies on volatility.

Findings

Up until 2005, the trades by non-clearing member firms in the futures market were separated from institutional traders providing us the opportunity to study trading strategies adopted by large distinct trading groups and its effects on volatility in the futures markets. It is found that individual traders use momentum strategy, whereas market makers and institutional traders use contrarian strategy. Momentum strategy adopted by individual traders increases volatility whereas contrarian strategy dampens volatility. Moreover, it is found that institutional traders engage more actively in contrarian trading when individual traders cause excessive volatility. The two distinct trading groups were separately tracked prior to 2005 giving us a unique window to determine the effect of the traders that conduct momentum trading as opposed to the ones that are contrarian traders. After the reclassification, the institutional trading group exhibited weaker contrarian strategy which can be attributed to the inclusion of non-clearing firm traders.

Originality/value

This study documents the first empirical evidence that shows off-exchange futures trader group is not composed of only pure noise makers, but there are short-term forecasters in its group. The authors also show a unique finding that noises caused by off-exchange group is from momentum strategy that they use, whereas contrarian strategy is used by institutional trader lower volatility.

Details

Review of Accounting and Finance, vol. 19 no. 1
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 24 September 2021

Lu Yang

To capture the last hour momentum over the intraday session, the authors develop a trading strategy for the exchange-traded fund (ETF) that is effective because of the T+0 trading

653

Abstract

Purpose

To capture the last hour momentum over the intraday session, the authors develop a trading strategy for the exchange-traded fund (ETF) that is effective because of the T+0 trading rule. This strategy generates annualized excess return of 9.673%.

Design/methodology/approach

In this study, the authors identify a last hour momentum pattern in which the sixth (seventh) half-hour return predicts the next half-hour return by employing high frequency 2012–2017 data from the China Securities Index (CSI) 300 and its ETF.

Findings

Overall, both the predictability and the trading strategy are statistically and economically significant. In addition, the strategy performs more strongly on high volatility days, high trading volume days, high order-imbalance days and days without economic news releases than on other days.

Originality/value

Noise trading, late-information trading, infrequent rebalancing and disposition effects from retail investors may account for this phenomenon.

Details

China Finance Review International, vol. 12 no. 1
Type: Research Article
ISSN: 2044-1398

Keywords

Article
Publication date: 12 April 2019

Nirodha Imali Jayawardena, Akihiro Omura and Bin Li

The purpose of this paper is to examine what the optimal time is in a typical trading day for investors to buy/sell stocks in the Australian stock market.

Abstract

Purpose

The purpose of this paper is to examine what the optimal time is in a typical trading day for investors to buy/sell stocks in the Australian stock market.

Design/methodology/approach

The study mainly focuses on the S&P/ASX200. Each trading day, between 10:00 a.m. and 4:00 p.m., is divided into 30-min blocks. The effectiveness of easily implementable trading strategy to purchase the index in the morning and sell at the close is tested. The study controls for the excess overnight price volatility to improve the effectiveness of the investment strategy. This trading strategy is compared against other 66 possible day-trading combinations.

Findings

The results show that the trading strategy of buying in the first 30 min of the trading session and close off the position during the last 30 min obtains higher returns than other 66 strategies.

Practical implications

The day-trading strategy proposed in this study is very simple and therefore can be easily implemented by investors including individual investors.

Originality/value

To the best of our knowledge, this is the first study which constructs a trading strategy using the J- or U-shaped intraday return pattern.

Details

International Journal of Managerial Finance, vol. 15 no. 4
Type: Research Article
ISSN: 1743-9132

Keywords

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