Dynamic Pairs Trading Strategy for the Companies Listed in the Istanbul Stock Exchange

Bolgün, Kaan Evren; Kurun, Engin; Güven, Serhat
March 2010
International Review of Applied Financial Issues & Economics;Mar2010, Vol. 2 Issue 1, p37
Academic Journal
In this research we performed pairs trading strategy based on a comparative mean reversion of asset prices with daily data over the period 2002 through 2008 in Istanbul Stock Exchange. We did not categorize stock pairs by sectors and therefore it is possible to observe mean reversion characteristics of different stocks that are selected from ISE-30 index. The initial formation period is 125 days (approx. 6 months) while we measure the performance results daily. Then both formation process and trading strategies have been structured as dynamic (rolling windows) market trading model through 2008. The results indicate that pairs produced average returns of % 3.36 daily comparing with individual stocks within the index and the index itself. However ISE30 daily average return performance is % 0.038 between 2002-2008 period. Our trading constraints and trading commissions take away the excess return on pairs mostly. Furthermore, the performance analysis reveals that the pairs trading strategy yields excess returns with less volatility than the market portfolio.


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