Research On High Frequency Pair Trading Strategy In Chinese Stock Market

Recent years,along with the innovation of computing and big data technology,quantitative trading strategy has played a more and more important role in modern financial market,these strategies that based on high frequency data and mathematical model could bring a stable return no matter how the market fluctuate.As one of quantitative trading strategies,pair trading aims to find the optimal stock pair of which historical price display a co-movement trend,then construct the long-short portfolio and gain market neural return from the mean revision of spread.Unlike other study based on low frequency daily data,we construct our pair trading strategy based on 5mins high frequency data of HS300 constituent stocks.In order to find the optimal strategy which could fit Chinese market well,we improve the classical OU strategy from three aspects:stochastic spread model,pair selection and threshold.Firstly,we add a Levy process which includes a double-exponential compound position distribution into original OU process,it could fit the spread better because Levy process grab the jump points in spread.Then,in pair selection part,we choose realized volatility to take place of sample standby deviation because it could measure spread volatility better.Therefore,we take into account the mean revision speed and realized volatility as our pair selection standard.For the threshold setting,we take the estimated realized volatility of HAR-RV model as our upper and lower limit of threshold.Including all three improvements,we construct LOM-RV-HAR strategy,its back test results show that the accumulate return is 194.29%,annualized return is 78.69%,they are both higher than the market’s performance,which prove our strategy is efficient.On the other hand,we compare LOM-RV-HAR strategy with other four strategies which are control in one or two strategy stage.The results testify that our improvements of stochastic spread model,pair selection and threshold could affect strategy return in a positive way.In the last part,we testify the stability of our strategy performance in different market periods and coefficient setting by the robustness test.