Statistical Arbitrage in Emerging Markets: A Global Test of Efficiency

Abstract

In this paper, we use a statistical arbitrage method in different developed and emerging countries to show that the profitability of the strategy is based on the degree of market efficiency. We will show that our strategy is more profitable in emerging ones and in periods with greater uncertainty. Our method consists of a Pairs Trading strategy based on the concept of mean reversion by selecting pair series that have the lower Hurst exponent. We also show that the pair selection with the lowest Hurst exponent has sense, and the lower the Hurst exponent of the pair series, the better the profitability that is obtained. The sample is composed by the 50 largest capitalized companies of 39 countries, and the performance of the strategy is analyzed during the period from 1 January 2000 to 10 April 2020. For a deeper analysis, this period is divided into three different subperiods and different portfolios are also considered.

Adaptive Market Hypothesis and Predictability: Evidence in Latin American Stock Indices

“…This suggests that returns of the indices follow a random walk not in the whole sample but during some periods. This is also consistent with results presented in the econophysics literature, where, using different models and tools from physics, some authors (e.g., Balladares et al 2021; Ferreira 2018; Ferreira, Dionísio, and Movahed 2017; Milos et al 2020; Sánchez-Granero et al 2020; Zunino et al 2007) found long- or short-term memory in the financial series, suggesting the temporary presence of arbitrage opportunities and a rejection of the random-walk hypothesis, as well as the EMH. Likewise, news from the financial sector (national bonds and the stock market), from the technology and telecommunications sectors, and at the macroeconomic level (external debt, interest rates and exchange rates) could have affected the efficiency of these Latin American markets: when the tests were statistically significant at the same time, the most relevant news items were related to these topics.…”

“…Econophysics has also been used to evaluate the efficiency in financial markets, and it has shown that stock prices present a kind of long-term memory, which violates one of the assumptions of the EMH and the RWH. For instance, some authors have used methods and physics models such as the Hurst exponent and the detrended fluctuations analysis (Bęben and Orlowski 2001; Costa, Silva, and Ferreira 2019) to assess the returns, volatility, and behavior of tails distributions of returns in data, such as for cryptocurrencies (Dimitrova et al 2019), foreign exchange rates (Di Matteo, Aste, and Dacorogna 2005), and developed and emerging markets (Sánchez-Granero et al 2020; Zunino et al 2007; Balladares et al 2021; Cajueiro and Tabak 2005, 2004; Ferreira 2018; Ferreira, Dionísio, and Movahed 2017; Milos et al 2020), which evaluate whether there is long- or short-term memory in these time series. They used different trading strategies, reaching results that show that from time to time arbitrage opportunities arise for a short while and then disappear.…”

The (In)Efficiency of Emerging and Developed Markets: An Analysis from Fractal Theory

“…Secondly, and considering the possibility of arbitrage, the presence of inefficiencies ends up generating windows of opportunities for abnormal gains, which, as they are detected and taken advantage of by various agents in the stock market, are no longer relevant, which implies a reduction of movements in the market focused on that strategy, which, in turn, ends up increasing market efficiency. Such conclusion is corroborated by the analyses of Dima et al (2021), Balladares et al (2021), andSánchez-Granero et al (2020), signaling that the existence of a higher degree of inefficiency enables the use of graphical analyses to obtain abnormal returns.…”

A Cooperative Dynamic Approach to Pairs Trading

“…Pairs Trading is a market-neutral statistical arbitrage strategy. Recent studies (Ramos-Requena et al [30]) have proved that it is a profitable strategy in periods of high instability in developed markets and also in nonefficient markets (Sanchez-Granero et al [47] and Balladares et al [48]) such as emerging ones.…”