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.

Mean of Bivariate equal weight pair strategy returns is = ^strategy = 314%

Mean of 1000 random return from NSE Nifty 50 index = ^Naive = 16.00%

ANOVA
Artificial_pair equal bi simulation
Sum of Squares df MeanSquare F Sig.
Between Groups 455.68 1 455.689 451.91 1.029E-83
Within Groups 1060.7 1052 1.00835
Total 1516.4 1053

Table10: ANOVA result for bivariate (equal) pairs

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. Pair strategy return is much higher than the Naive return, and hence it’s recommended to invest in bivariate equal weight pair to cash the arbitrage opportunity.

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