Journal of Korean Society of Industrial and Systems Engineering (산업경영시스템학회지)

Society of Korea Industrial and System Engineering (한국산업경영시스템학회)
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Developing Pairs Trading Rules for Arbitrage Investment Strategy based on the Price Ratios of Stock Index Futures

주가지수 선물의 가격 비율에 기반한 차익거래 투자전략을 위한 페어트레이딩 규칙 개발

  • Kim, Young-Min (Dept. Information and Industrial Engineering, Yonsei University) ;
  • Kim, Jungsu (Business School, Kwangwoon University) ;
  • Lee, Suk-Jun (Business School, Kwangwoon University)
  • 김영민 (연세대학교 정보산업공학과) ;
  • 김정수 (광운대학교 경영학부) ;
  • 이석준 (광운대학교 경영학부)
  • Received : 2014.08.07
  • Accepted : 2014.11.21
  • Published : 2014.12.31
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Abstract

Pairs trading is a type of arbitrage investment strategy that buys an underpriced security and simultaneously sells an overpriced security. Since the 1980s, investors have recognized pairs trading as a promising arbitrage strategy that pursues absolute returns rather than relative profits. Thus, individual and institutional traders, as well as hedge fund traders in the financial markets, have an interest in developing a pairs trading strategy. This study proposes pairs trading rules (PTRs) created from a price ratio between securities (i.e., stock index futures) using rough set analysis. The price ratio involves calculating the closing price of one security and dividing it by the closing price of another security and generating Buy or Sell signals according to whether the ratio is increasing or decreasing. In this empirical study, we generate PTRs through rough set analysis applied to various technical indicators derived from the price ratio between KOSPI 200 and S&P 500 index futures. The proposed trading rules for pairs trading indicate high profits in the futures market.

Keywords

References

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