Pairs Trading with Turkish Stocks

Middle Eastern Finance and Economics, No. 7, pp. 38-54, 2010

17 Pages Posted: 2 Jul 2012

See all articles by Alovsat Muslumov

Alovsat Muslumov

Dogus University

Asli Yuksel

Isik University

Sadettin Aydin Yuksel

Isik University-Department of Management

Date Written: July 2, 2010

Abstract

Recent evidence from US stock markets shows that pairs trading strategy earns positive abnormal profits. The profitable implementation of this strategy requires the existence of strong arbitrage forces to make the prices of the stocks in a pair converge soon after the position is opened. This paper argues that arbitrage forces and as a result the performance of pairs trading strategy will be weaker in emerging than developed markets.To present evidence on this claim, it examines the performance of pairs trading strategy using data from the Istanbul Stock Exchange (ISE). Characterized by the absence of option trading for its stocks and relatively high transaction costs, the ISE provides a suitable setting for examining this claim. Overall, the results give moderate support to this argument. Nonetheless, they show that relatively large positive excess returns are available around short trading periods of between one and two months. None of the potential explanations considered, namely the level of transaction costs, the systematic risk of the pairs portfolio and the existence of short term mean reversion in stock returns, can explain the positive profits for short trading periods.

Keywords: pairs trading, quantitative strategy, market efficiency

JEL Classification: G1

Suggested Citation

Muslumov, Alovsat and Yuksel, Asli and Yuksel, Sadettin Aydin, Pairs Trading with Turkish Stocks (July 2, 2010). Middle Eastern Finance and Economics, No. 7, pp. 38-54, 2010, Available at SSRN: https://ssrn.com/abstract=2097661

Alovsat Muslumov (Contact Author)

Dogus University ( email )

Zeamet Sok. 21
Acibadem, Kadikoy
Istanbul, 34722
Turkey

Asli Yuksel

Isik University ( email )

Buyukdere Caddesi
Ayasaga
Maslak, Istanbul 80670
United States

Sadettin Aydin Yuksel

Isik University-Department of Management ( email )

Sile
Istanbul
Turkey

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