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Improving statistical arbitrage investment strategy: Evidence from Latin American stock markets
Author(s) -
Caneo Fernando,
Kristjanpoller Werner
Publication year - 2021
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.2023
Subject(s) - sharpe ratio , economics , statistical arbitrage , volatility (finance) , econometrics , profitability index , trading strategy , arbitrage , stock (firearms) , pairs trade , financial economics , portfolio , investment strategy , stock market , algorithmic trading , monetary economics , risk arbitrage , capital asset pricing model , finance , arbitrage pricing theory , market liquidity , alternative trading system , mechanical engineering , paleontology , horse , engineering , biology
This paper analyses the profitability of pairs trading strategy in Latin American stock markets through a PCA approach with a multi‐factorial model. We propose two criteria for selecting the optimal thresholds by using moving training‐trading windows. By applying the methodology in six countries with 338 stocks in total for the period 2013–2017, we found that this strategy outperforms the markets' Sharpe ratio by 1.55 points on average. In addition, by using a correlation matrix, we found that the largest eigenvalue is clearly dominant and that its associated eigenportfolio presents a co‐movement with the market while the number of dominant components is contrary to market volatility.