英文摘要 |
This paper calculates return divergence between a specific stock and its benchmark portfolio and conducts pair trading strategy according to the degree of divergence. Using Taiwan stock sample from February 1995 to December 2019, the pair trading strategy generates monthly 0.85% raw returns and 0.91% risk-adjusted returns on average, approximately 4.32 times of TAIEX returns. The findings indicate that the pair trading strategy is market-neutral. The divergence pair trading strategy is profound in small size and high book-to-market ratio stocks. The performance is robust after controlling size and book-to-market ratio. We document that the key factor to explain divergence pair trading performance is the short-term momentum effect of the benchmark portfolio. |