Abstract:We carry out a large-scale empirical data analysis to examine the efficiency of the so-called pairs trading. On the basis of relevant three thresholds, namely, starting, profit taking, and stop loss for the 'first-passage process' of the spread (gap) between two highly correlated stocks, we construct an effective strategy to make a trade via 'active' stock-pairs automatically. The algorithm is applied to 1784 stocks listed in the first section of the Tokyo Stock Exchange leading up to totally 1,590,436 pairs. … Show more
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