Work detail

Pairs trading at CEE markets

Author: Bc. Jakub Šedivý
Year: 2017 - summer
Leaders: Ing. Aleš Maršál
Consultants:
Work type: Bachelors
Language: English
Pages: 58
Awards and prizes:
Link:
Abstract: We investigate the use of investment strategy called pairs trading on small-sized equity
markets located in Central Eastern Europe. Pairs trading is self-financing trading strategy
that identifies two stocks based on their historical relationship, and makes profit on their
short-term relative mispricing, since the strategy relies on their convergence into the longterm
equilibrium. The objective of this thesis is to compare two different methods of pairs
trading, distance method based on minimizing the sum of squared deviations between normalized
historical prices and cointegration method using daily data from June 2008 to
March 2017. We examine whether any of those method is profitable on Prague Stock
Exchange, Bucharest Stock Exchange and Budapest Stock Exchange and can be used on
such markets with high industry diversity. Our findings were not stastically different from
zero in all but one case and majority of average returns was negative. In comparison to
US and Finnish equity markets the strategy falls behind. Even though we identified some
cointegrated pairs, their profitability was more than questionable and further investigation
showed that small equity markets such as the ones we have studied are not a good
fit for pairs trading strategy.

Partners

ČSOB
Deloitte
McKinsey & Company

Sponsors

CRIF