PAIR TRADING STRATEGY IN INDIAN CAPITAL MARKET: INTRODUCTION(3)

INTRODUCTION(3)

Ultimately, the difference between the strategies originates from their definition of “mispricing”. The long/short strategies described by Jacobs and Levy (1993) refer to an absolute mispricing.

Both classes of strategies, as defined by Do et al (2006) require the simultaneous opening of long and short positions in different stocks and thus, fall under the “umbrella of long/short equity investments” (Do et al, 2006 p.1). Debate continues amongst academics and practitioners alike regarding the role, if any, of market neutrality for a successful pairs trading strategy.

Pair trading strategy is a very ancient concept and used by the investors extensively worldwide. The strategy by its nature has the potential of bagging the arbitrage opportunity on a varied timeframe as well can be used for hedging the existing exposure of an asset by finding suitable pair for it. In India there is a very few evidence of organized pair trading strategy. The study aims to find out the potential and applicability of the pair trading strategy in Indian capital market. It’s a known fact that pair trading requires understanding of the industry pairs and their behavioral nature. The study brings out the nature of variability of the pairs and their applicability.

Representative APR 391%

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