Using dynami̇c pairs trading strategy in investment decisions: An application on Istanbul Stock Exchange

Finding profitable trading strategies is a popular and continously attempt among academicians, investors and practitioners in finance world. One of the popular strategy among all developed investmentstrategies is pairs trading which is used by many hedge funds around the World. Pairs trading strategy is a market neutral strategy. Market neutral strategies tend to take long and short positions at the same time in order to eliminate market risk. Pairs trading is a relative value arbitrage strategy that uses historical price data belongs to companies. Therefore pairs trading is classified as statistical arbitrage strategy by some of researchers and professionals. Objective of this study is to find out if pairs trading strategy is profitable on Istanbul Stock Exchange as an emerging market. Adjusted daily closing stock prices, belong to 15 banking companies, between 2007 and 2013, used in order to test the strategy. Distance method was employed to match stocks as pairs and threshold values were taken between 1.5 and 3.0. Formation period was chosen in a differentiating way from 125 days to 1000 days to catch relationship between stocks The results show that pairs trading strategy is profitable on Istanbul Stock Exchange.