Evaluating the Performance of a Pairs Trading System in Tehran Stock Exchange: the Cointegration Approach and Sortino Ratio Analysis
Subject Areas : Financial engineeringSaeid Fallahpour 1 , hasan hakimian 2
1 - Assistant Prof., Financial Management, Faculty of Management, University of Tehran, Tehran, Iran
2 - MSc. Student in Financial Engineering, Faculty of Management, University of Tehran, Tehran, Iran
Keywords: cointegration, spread, Pairs trading, Sortino Ratio, Mean-Reverting Process,
Abstract :
Algorithmic trading system is a trading system that utilizes highly advanced models is used for trade decision-making in the financial markets. The System of "pairs trading" is also typical of these systems. Pairs trading system is one of the oldest systems of algorithmic trading that its performance and profitability have been proven and shown in many of the studies that have been conducted so far in the financial markets. The most important principle in pairs trading is the equivalent long run relations or the mean reversion property. In this study, by calculating and evaluating the Sortino Ratio and return, performance of the pairs trading system has been surveyed through the cointegration approach in the Tehran Stock Exchange. The experimental results on pair stocks of selected in the Tehran Stock Exchange shows that using the pairs trading system as a market neutral trading systems has a significant return than return on ordinary shares in the same period.
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