## 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%

 ANOVA Artificial_pair equal tri simulation Sum of Squares df MeanSquare F Sig. Between Groups 354.08 1 354.08 1186.861 5.03E-175 Within Groups 315.6365 1058 0.298333 Total 669.7165 1059

Table 13.

Two series of variables are grouped and tested. Test result signifies that F value is very high compared to Critical F value. Hence the Null hypothesis is rejected at 99% confidence level. So, the means of Pair strategy return and Naive return are statistically different. Trivariate equal weigh Pair strategy return is much higher than the Naive return, and hence itâ€™s recommended to invest in trivariate equal weight pair to cash the arbitrage opportunity.

Artificial Pair with 2 stocks formed using Correlation Weight Method

For this segment of correlation weighed pairs, trade signal wise generated no of trades are plotted to get the trend.

 Trade signal Avg. No. of Trades 0.7/0.5 6.7 0.7/0.4 5.1 0.6/0.4 7.1 0.6/0.3 5.6 0.5/0.3 7.5 0.5/0.2 5.9 0.4/0.2 8.0 0.4/0.1 6.2 0.3/0.1 8.0

Table 14: Avg no. of trade for correlation weight method

All the 101 bivariate pairs with correlation weigh are not found feasible for trading. Empirical result shows, pairs with low correlation with the trading asset are having higher volatility and hence give uncertain return. So, a cut off correlation is derived for this segment, which is shown graphically below. The cut off correlation value is 0.72. For further analysis the pairs with correlation above 0.72 are only considered as they follow conventional risk-return relationship. 64 such pairs are found in this segment.