DOES PAIR TRADING WORK IN THE KOREAN MARKET?

초록

We apply statistical arbitrage to conduct pair trading in the Korean stock market. We first construct a multifactor model in 5 selected sectors with the premiums from sector, size, value and momentum portfolios. Sector premium is the excess return of sector indexes over call rate. Second, we investigate whether the residuals from the multifactor model include predictable dynamics. Third, we implement pair trading considering the predictable dynamics of residuals and transaction costs. We control for standard risk factors and transaction costs, yet still find significant trading profit that prior literature cannot explain. Active asset managers can implement our pair trading strategies to enhance their portfolio performance. Our results suggest implications to both academic researchers and practitioners such as active fund managers, risk managers and traders.

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