PAIR TRADING STRATEGY IN INDIAN CAPITAL MARKET: HYPOTHESIS

For each class of pairs the trading strategy return is compared with simulated return. For each comparison blanket hypothesis is:

Null Hypothesis H0: Means of strategy return and simulated return are equal

^strategy = ^Naive

Alternate Hypothesis H1: Means of strategy return and simulated return are not equal strategy Naive

SAMPLING PROCEDURE

For secondary data analysis the stocks were chosen from the NSE listed firms. 4 most important industries are chosen as the scope of the study. These industries are Banking Industry, IT and ITes Industry, Infrastructure Industry and Pharmaceutical Industry

In these industries the cut off liquidity is set and the stocks above that level is taken as sample stocks. Cut off liquidity is set in terms of average trade volume in study period and it is 800000. All stocks above this level are considered as eligible to be sample stock in this study.

DATA ANALYSIS

In the selected 4 industries out of 26 sample stocks, industry wise all possible pairs are formed. Pairs are made industry wise because the volatility in the pair returns is less within the same industry, whereas between the industry pair’s standard deviation is high. Hence cross industry pairs are not a feasible option for investment and hence excluded. These pairs include:
• All Natural pairs
• All Artificial pairs with 2 stocks and
• All Artificial pairs with 3 stocks

Representative APR 391%

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