Pairs trading in the Taiwan, Hong Kong, and China stock markets before and after short-selling deregulation

Authors: Jai-Jen Wang

Journal: Corporate Management Review. June. 2020, 40(1): 35-75.

Keywords: Pair trading; short-selling deregulation; distance filter; frequency filter; investor discipline.

Abstract:
This research explores the performance of pair-trading strategies in the Taiwan, Hong Kong, and China stock markets. While their profitability in the China and Hong Kong markets is not as significant as that in the Taiwan market, the empirical results are robust to bankruptcy risk and different filters of pair trades during 1990/1/4~2017/6/30. The industry effect for financial pair trades prevails in the Hong Kong and the Taiwan markets, but its significant and positive profitability drops after those markets’ short-selling deregulations appear. This study also notes that a lack of investor discipline raises a misleading comprehension for pair-trading profitability in the three markets.