PAIR TRADING STRATEGY IN INDIAN CAPITAL MARKET: Correlation Weight Method(1)

All the 85 trivariate pairs with correlation weigh are not found feasible for trading. Cut off correlation is derived for this segment, which is shown graphically below. The cut off correlation value is 0.68. For further analysis the pairs with correlation above 0.68 are only considered as they follow conventional risk-return relationship. 60 such pairs are found in this segment.

For these 60 pairs individual sample 2-tail t-test is done for each trading signal to check the statistical significance of the obtained returns. The test result includes mean return for each signal, standard deviation of each signal set, and t statistics. The test result is shown below: Read more »

PAIR TRADING STRATEGY IN INDIAN CAPITAL MARKET: Artificial Pair(3)

Artificial Pair(3)

For these 64 pairs individual sample 2-tail t-test is done for each trading signal to check the statistical significance of the obtained returns. The test result includes mean return for each signal, standard deviation of each signal set, and t statistics. The test result is shown below: Read more »

PAIR TRADING STRATEGY IN INDIAN CAPITAL MARKET: Artificial Pair(2)

Mean of Bivariate equal weight pair strategy returns is = ^strategy = 268%

Mean of 1000 random return from NSE Nifty 50 index = ^Naive = 17.53% Read more »

PAIR TRADING STRATEGY IN INDIAN CAPITAL MARKET: Artificial Pair(1)

Artificial Pair

All the 85 trivariate pairs with equal weigh are not found feasible for trading. Cut off correlation is derived for this segment, which is shown graphically below. The cut off correlation value is 0.67. For further analysis the pairs with correlation above 0.67 are only considered as they follow conventional risk-return relationship. 60 such pairs are found in this segment.

For these 60 pairs individual sample 2-tail t-test is done for each trading signal to check the statistical significance of the obtained returns. The test result includes mean return for each signal, standard deviation of each signal set, and t statistics. The test result is shown below: Read more »

PAIR TRADING STRATEGY IN INDIAN CAPITAL MARKET: Natural Pair(3)

For 53 degree of freedom t critical value (2 tailed) at 95% confidence level is 1.997. In the test result all the obtained t values are greater than the critical value, which suggests that the return series of every trade signal are statistically significant at 95% confidence level. In other words, it suggests that the average returns are feasible and reproducible in the future following the same trade signal.

This pair trading strategy return is statistically compared with the naive approach return. For the purpose the average of all signal return of every eligible pair is compared with the 1000 random simulation return from the NSE Index in the same time frame of the study. One way ANOVA testing has been done for mean comparison.

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PAIR TRADING STRATEGY IN INDIAN CAPITAL MARKET: Natural Pair(2)

Natural Pair(2)

Mean of Natural pair strategy returns is = ^strategy = 386%

Mean of 1000 random return from NSE Nifty 50 index = ^Naive = 16.89%

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PAIR TRADING STRATEGY IN INDIAN CAPITAL MARKET: Natural Pair(1)

For 73 natural pairs, trade signal wise generated no of trades are plotted to get the trend.

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