Pairs trading strategies in Indian equity markets

Abstract

In the conventional arbitrage strategy sure profits are made by going long on certain assets and short on others. This basically indicates a clear case mispricing of securities and this mispricing holds true under any future circumstances. Statistical Arbitrage on the other hand is actually not a case of sure profits. The strategy is adopted under the assumption that certain relationships between securities hold true in the long run. Any deviation from this long run expected relationships leads to a direct impact on the profits.i Some basic features of statistical arbitrage strategies are given below: * Trading is done based on statistical rules and not on company fundamentals. These strategies are generally carried out by hedge funds or in trading desks which specialize in quant trading. * It is generally a market neutral strategy. * Profits are made by using a single strategy a repeated number of times. The assumption is that a basic statistical relationship holds true in the long run (the law of large numbers) The statistical arbitrage talked about in this report is called “Pairs Trading”.