Black-Scholes-Model-Based Statistical Arbitrage in China
Setting
In the Black-Scholes framework of stock price dynamics, i.e.
In a market where short sell becomes not allowed. As a result, the no-arbitrage condition becomes given by:
If an investor knows or believes that he knows the stocks that satisfy the statistical arbitrage condition, then this is sufficient to design statistical arbitrage trading strategy.
Analytical Analysis
Statistical Arbitrage
Definition
Strategies
Buy & Hold Until Deterministic Barrier Strategy: a self-financing trading strategy with a deterministic boundary that consists of buying and holding one unit of stock financed by borrowing from the bank with constant risk-free rate.
Backtest in China
Description
Assume the risk-free rate as 2%, based on the money account deposit rate in China. It is not a exact value, but rather
an estimation, since the time span for reinvestment is not fixed.
Assume the transaction cost is 0.06% of the deal price, considering commission fee, tax and others.
Set k at 1.
Results on Single Stock
The strategy is valid for sz000001, sh600000, sh600001.
Conclusion
In conclusion, the estimation of stocks’ s and s and needs to be improved. And lastly, the parameters for the models can be optimized.
Further, it is possible to form portfolio that choose better performing stocks, reaching higher profit and reducing possibility of loss by decreasing the variance and avoiding stocks like sh600004.
Written by Jiaxuan Liang
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Black-Scholes-Model-Based Statistical Arbitrage in China
