Pair-trading profitability and short-selling restriction: Evidence from the Taiwan stock market

摘要

This paper examines the profitability of a pair-trading strategy in the Taiwan stock market while considering alternative frequency-distance filters, thresholds for opening a pair trade relationship, reinvestment mechanisms, different lengths of trading period, industry boundary, and the short selling restriction. In contrast with the recent literature showing that pair-trading strategy returns are insignificant and negative in the Taiwan stock market, we find that the profitabilities of pair trades developed by positions in the Taiwan 50 Index during 1990/1-2016/3 present significant annualized mean returns of 1.84%-3.04%. Moreover, thresholds with different stringent degrees, industry boundary, and alternative reinvestment mechanisms are unable to help pick out more profitable pair-trading portfolios. The distance filter and shorter trading-day setting are more reliable for pair trading. Finally, the deregulation on short selling results in more pair-trading activities, which obviously diminish the profitability of a pair-trading strategy.