PAIR TRADING STRATEGY IN INDIAN CAPITAL MARKET: REVIEWS OF LITERATURE(1)

“Pair trading is one of Wall Street’s quantitative methods of speculation which dates back to the mid-1980s (Vidyamurthy). There are many methods of pairs trading, out of which 2 most important are distance trading and cointegration model.

The distance method is used in Gatev 3 et al (1999) and Nath 4 (2003) for empirical testing where as the Cointegration method is detailed by Vidyamurthy (2004).The application of this particular strategy has 3 already been conducted for financial time series. This includes the work of Nath (2003), Gatev et al (1999) and, more recently, Perlin (2006b)5.

In opposition to the market efficiency theory, several papers have showed that past information is able, in some extent, to explain future stock market returns. Such predictability can appear in different ways, including time anomalies (day of the weak effect, French (1980)) and correlation between the asset’s returns and others variables, Fama and French 6 (1992). A substantial review on the market efficiency subject can be found at the papers of Fama 7 (1991) and Dimson e Mussavian 8 (1998).

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