Dynamic Pairs Trading Strategies for Constrained Emerging Markets
- 1 School of Mathematics and Statistics, Wuhan University, Wuhan, China
Abstract
This study develops three pairs trading strategies tailored for China’s A-share market, addressing unique constraints including price limits and transaction costs. Using GICS sector 2010 stocks (2018-2019), we establish: (1) A stable 20-day lookback strategy with 8.6% annualized returns and 10.7% max DD. (2) A dynamic volatility-adjusted approach delivering 13.6% annualized returns at 7.7% max DD. (3) A hybrid cointegration-volatility strategy achieving 10.6% annualized returns with 6% max DD. All strategies incorporate China-specific parameters (0.4% round-trip costs, short-selling constraints). The hybrid approach demonstrates superior performance with an 84% positive return probability and robust risk-adjusted returns (Sharpe ratio ≈ 1.03). Regression analysis reveals limited predictability (R 2 = 3.38%), highlighting modeling challenges in China’s retail-driven market. These findings provide institutional investors with a quantifiable tradeoff between returns (dynamic) and robustness (hybrid), while advancing emerging market strategies through explicit price-limit integrations.
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