Improving statistical arbitrage investment strategy: Evidence from Latin American stock markets

Abstract

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.

Testing of Portfolio Optimization by Timor-Leste Portfolio Investment Strategy on the Stock Market

“…In this objective, investment strategy still encounters obstacles faced by both investors and researchers who can contribute to investment decisions with better knowledge. For example, the study by Caneo and Kristjanpoller (2021) aims to improve the statistical value of investment strategies by analyzing the profitability of pair trading strategies in Latin American stock markets. The results showed that the profitability strategy of pair trading outperforms the Sharpe ratio of the market by 1.55 points on average.…”