| Summary: | 碩士 === 樹德科技大學 === 金融保險研究所 === 94 === Low Risk Strategy with Abnormal Returns
- The Example of Pairs Trading
Student: Chieng-Kuo Liu Adviser: Shih-Jen Liao
Graduate School of Insurance and Finance
Shu-Te University
ABSTRACT
This research studies the company information, such as stock price, items of business and products, business income, business profit ratio, capitalization, etc., of Taiwan Stock Exchange listed stocks,. The sampling period is from April, 2004 to March, 2005. The coefficient correlation, standard deviation, stock price ratio of the paired stocks are calculated by applying computer programming techniques, through the combination with the pairs trading strategy model.
The purpose is to verify: (1) Paired trading strategies have abnormal returns in Taiwan stock market. (2)When the variable of earning growth rate was implemented into the paired trading model, higher returns can be observed. (3)There are arbitrage opportunities between a pair of stocks which have medium to high correlation coefficient value. (4)No matter bull or bear markets, paired trading strategies can maintain certain returns.
The results indicate that paired trading strategies are applicable in Taiwan stock market. These strategies not only neutralize the risk of the investment portfolio, they also make reasonable profits without considering the market conditions. Through this strategy one can also verify that there is a certain relation of stock price ratios between a pair of stocks in the same industry. Using the paired trading strategies can easily make returns higher than the interest rates of one-year certificated deposit of the Bank of Taiwan.
Key words: pairs trading, abnormal return, low risk strategy, market neutral strategy
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