PAIR TRADING STRATEGY IN INDIAN CAPITAL MARKET: REVIEWS OF LITERATURE(3)

Juan Ledesma Padilla 14 (2005) in his research paper “Market Neutral” Strategy between Telecom Arg and Nortel Inversora shows long run relationships within valuation models, is expected that mean reverting forces are put in place and price converges to its fair value.

Binh Do, Robert Faff and Kais Hamza 15 (2006) proposed a general approach to model relative mispricing for pairs trading purposes, in a continuous time setting. The novelty in this approach lies in its quantification of mean reversion behavior, taking into account theoretical asset pricing relationships.

Marcelo Scherer Perlin 16 (2006) has suggested a univariate approach of pair trading considering the market transaction cost and extended his own work by suggesting a multivariate approach of pair trading. The basic idea of this proposed approach is to build a pair for each stock based on information of others stocks, instead of just finding one, as was done in the univariate method.

Joseph Engelberg, Pengjie Gao and Ravi Jagannathan 17 (2007) investigated the source of profits from pairs trading. They documented that the profitability from pairs trading is strongly related to the way information diffuses across the stocks in the pair and the frictions which stifle this information flow.

Michael Bock and Roland Mestel 18 (2008) in their paper of A regime-switching relative value arbitrage rules how the relative value arbitrage rule (“pairs trading”) is a well-established speculative investment strategy on financial markets, dating back to the 1980s.

Christian Oliver-Ewald, Ian Gregory and Pieter Knox 19 (2010) showed in their paper OU, CIR and GARCH Dilution as a Sequential Stopping Problem for Pairs Trading that, how arbitrarily sized long/short baskets whose port- folio value is modelled with spread or ratio of any asset weighting can be treated as a sequential stopping problem.

Representative APR 391%

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