Abstract: The objective of this study was to investigate the profitability of pairs trading on the Zimbabwe Stock Exchange (ZSE). Pairs trading is an algorithmic trading strategy that aims to trade pairs based on cointegration between two stocks. Logarithmic stock prices for the top ten listed stocks were used in the study. Potential pairs were first identified by testing for cointegration using the Engle Granger (1988) and the Johansen test (1987). The selected pairs were modelled by the Vector Error Correction Model to produce the spread series. From the 45 pairs formed, four were found to be cointegrated. The four pairs were hypothetically traded based on historical performance of the spread. Pairs trading was implemented by monitoring the position of the spread relative to its long-run equilibrium. For each chosen pair, a short and long position is taken when the spread is significantly above and below zero respectively. A position is reversed when the spread reverts back to zero (0). One pair showed consistent returns from 2009 to 2016 whereas other pairs had varying profits. Returns from the strategy for all pairs ranged from 0.84% to 39% after deducting transaction costs, showing that the strategy is relatively profitable despite the declining returns being registered by the ZSE index.
Keywords: Zimbabwe Stock Exchange (ZSE), Pairs trading, Cointegration, Vector Correction Model (VECM), Engle Granger.
Title: INVESTIGATING THE PROFITABILITY OF PAIRS TRADING ON THE ZIMBABWE STOCK EXCHANGE (2009-2016)
Author: Mazuruse Peter, Lorreta Nyamadzawo, Muvingi Jacob, Chisunga David, Gwarimbo Willard
International Journal of Management and Commerce Innovations,
ISSN 2348-7585 (Online)
Research Publish Journals
