Statistical Arbitrage Portfolio Selection in the Old and New EU Member States
Statistical Arbitrage Portfolio Selection in the Old and New EU Member States

Author(s): Bálint Botos, László Nagy, Mihály Ormos
Subject(s): International relations/trade, EU-Accession / EU-DEvelopment, Financial Markets
Published by: Masarykova univerzita nakladatelství
Keywords: pairs trading; asset pricing; cointegration; statistical arbitrage; market neutral strategy;
Summary/Abstract: In this study we analyze the return gained by cointegration-based pairs trading arbitrage strategy in Western and Eastern European capital markets. To achieve that, we showcase the contrarian evidence to the weak form of market efficiency found. The aim of the paper is to explore the mean reversion nature of the highly cointegrated stock pairs and to create a trading strategy with predefined entry and exit points. The portfolios used are created over 250-day long testing periods based on the cointegration selection of the pairs and then traded for 125 days. The realized return between 2012 and 2017 were 16.98% and 20.74% annually in the Western end Eastern European markets respectively. We also evaluate the standard deviations of returns achieved by the strategy and the portfolios’ correlations to the MSCI Europe, S&P 500 and the riskfree rate. As the strategy result in low correlation to the market, we confirm its market neutrality. The Sharpe-ratios of the portfolios for the full sample period are 0.57 (western) and 0.92 (eastern) but come up to 1.89 and 1.39 in the last 10 years.

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