Some Notes on the Formation of a Pair in Pairs Trading

The main goal of the paper is to introduce different models to calculate the amount of money that must be allocated to each stock in a statistical arbitrage technique known as pairs trading. The traditional allocation strategy is based on an equal weight methodology. However, we will show how, with an optimal allocation, the performance of pairs trading increases significantly. Four methodologies are proposed to set up the optimal allocation. These methodologies are based on distance, correlation, cointegration and Hurst exponent (mean reversion). It is showed that the new methodologies provide an improvement in the obtained results with respect to an equal weighted strategy

Assessing the Role of Digital Finance on Shadow Economy and Financial Instability: An Empirical Analysis of Selected South Asian Countries

The advancement in fintech technological development in emerging countries has accelerated the role of digital finance in economic development. Digital finance assists in financial inclusion; however, it may also increase the chances of financial instability due to systematic risks. Emerging countries are also in the clutches of shadow economic growth, which reduces taxable income revenue and creates pressure on financial inclusion prospects. The current study attempts to measure the impact of digital finance on the shadow economic growth and financial stability among the selected South Asian emerging countries. We have used the CUP-FM and CUP-BC estimation methods to measure the above relationship on two model frameworks from 2004 to 2018, with the former measuring the influence of digital finance on the shadow economy and the latter examining the relationship between digital finance and financial stability. In addition, the second-generation unit root test, and the Westerlund cointegration analysis are also employed to confirm the stationarity and cointegration among the variables. The result of the Westerlund’s cointegration confirms a long cointegration between the explanatory and outcome variables. Furthermore, the long-run estimation results conclude that an increase in digital finance helps in reducing the growth of the shadow economy among the selected sample countries. However, it also increases the likelihood of systematic risks and increases financial instability. The study also reveals that the control variables like unemployment and industrial productivity also have a significant influence on financial stability and the shadow economy. The findings will assist readers in comprehending how digital finance influences the shadow economy and promotes financial inclusion and stability in emerging nations

An Alternative Approach to Measure Co-Movement between Two Time Series

The study of the dependences between different assets is a classic topic in financial literature. To understand how the movements of one asset affect to others is critical for derivatives pricing, portfolio management, risk control, or trading strategies. Over time, different methodologies were proposed by researchers. ARCH, GARCH or EGARCH models, among others, are very popular to model volatility autocorrelation. In this paper, a new simple method called HP is introduced to measure the co-movement between two time series. This method, based on the Hurst exponent of the product series, is designed to detect correlation, even if the relationship is weak, but it also works fine with cointegration as well as non linear correlations or more complex relationships given by a copula. This method and different variations thereaof are tested in statistical arbitrage. Results show that HP is able to detect the relationship between assets better than the traditional correlation method

A Novel Methodology to Calculate the Probability of Volatility Clusters in Financial Series: An Application to Cryptocurrency Markets

One of the main characteristics of cryptocurrencies is the high volatility of their exchange rates. In a previous work, the authors found that a process with volatility clusters displays a volatility series with a high Hurst exponent. In this paper, we provide a novel methodology to calculate the probability of volatility clusters with a special emphasis on cryptocurrencies. With this aim, we calculate the Hurst exponent of a volatility series by means of the FD4 approach. An explicit criterion to computationally determine whether there exist volatility clusters of a fixed size is described. We found that the probabilities of volatility clusters of an index (S&P500) and a stock (Apple) showed a similar profile, whereas the probability of volatility clusters of a forex pair (Euro/USD) became quite lower. On the other hand, a similar profile appeared for Bitcoin/USD, Ethereum/USD, and Ripple/USD cryptocurrencies, with the probabilities of volatility clusters of all such cryptocurrencies being much greater than the ones of the three traditional assets. Our results suggest that the volatility in cryptocurrencies changes faster than in traditional assets, and much faster than in forex pairs

Statistical Arbitrage in Emerging Markets: A Global Test of Efficiency

In this paper, we use a statistical arbitrage method in different developed and emerging countries to show that the profitability of the strategy is based on the degree of market efficiency. We will show that our strategy is more profitable in emerging ones and in periods with greater uncertainty. Our method consists of a Pairs Trading strategy based on the concept of mean reversion by selecting pair series that have the lower Hurst exponent. We also show that the pair selection with the lowest Hurst exponent has sense, and the lower the Hurst exponent of the pair series, the better the profitability that is obtained. The sample is composed by the 50 largest capitalized companies of 39 countries, and the performance of the strategy is analyzed during the period from 1 January 2000 to 10 April 2020. For a deeper analysis, this period is divided into three different subperiods and different portfolios are also considered

Exploring Arbitrage Strategies in Corporate Social Responsibility Companies

Today, Socially Responsible financial investment has taken on particular importance. Investors normally select their most profitable investments, but over the years they have appreciated that companies develop Socially Responsible policies. Financial indices have also created Socially Responsible versions. In this paper, we run a statistical arbitrage technique known as Pairs Trading using stocks of the FTSE4GOOD Socially Responsible Index. Different strategies will be tested to demonstrate that there are no significant differences between the performance of the portfolio composed by Corporate Social Responsibility (CSR) stocks and those composed by ordinary stocks

Volatility Co-Movement in Stock Markets

The volatility and log-price collective movements among stocks of a given market are studied in this work using co-movement functions inspired by similar functions in the physics of many-body systems, where the collective motions are a signal of structural rearrangement. This methodology is aimed to identify the cause of coherent changes in volatility or price. The function is calculated using the product of the variations in volatility (or price) of a pair of stocks, averaged over all pair particles. In addition to the global volatility co-movement, its distribution according to the volatility of the stocks is also studied. We find that stocks with similar volatility tend to have a greater co-movement than stocks with dissimilar volatility, with a general decrease in co-movement with increasing volatility. On the other hand, when the average volatility (or log-price) is subtracted from the stock volatility (or log-price), the co-movement decreases notably and becomes almost zero. This result, interpreted within the background of many body physics, allows us to identify the index motion as the main source for the co-movement. Finally, we confirm that during crisis periods, the volatility and log-price co-movement are much higher than in calmer periods

A New Look on Financial Markets Co-Movement through Cooperative Dynamics in Many-Body Physics

One of the main contributions of the Capital Assets Pricing Model (CAPM) to portfolio theory was to explain the correlation between assets through its relationship with the market index. According to this approach, the market index is expected to explain the co-movement between two different stocks to a great extent. In this paper, we try to verify this hypothesis using a sample of 3.000 stocks of the USA market (attending to liquidity, capitalization, and free float criteria) by using some functions inspired by cooperative dynamics in physical particle systems. We will show that all of the co-movement among the stocks is completely explained by the market, even without considering the market beta of the stocks

Más de medio siglo en busca de una teoría sobre los mercados de capitales

Este artículo de presentación del monográfico Mercados Financieros e Instrumentos se estructura en dos partes bien diferenciadas. La primer parte se dedica al debate existente sobre el comportamiento de los rendimientos de los activos financieros, presentando dos de las teorías más importantes, la Teoría del Mercado Eficiente y la Teoría del Mercado Fractal. En la segunda parte se realiza la presentación de los artículos que se publican en el monográfic

Algunas Notas sobre la Econofísica

Se denomina con el nombre de Econofísica al área multidisciplinar del conocimiento que intenta combinar la física, las matemáticas y los distintos campos que abarcan la economía. El término fue acuñado por H. Stanley para intentar agrupar al gran número de artículos que los físicos estaban escribiendo en busca de alternativas a diversas cuestiones abiertas en la economía, fundamentalmente en las finanzas de mercado. Este término aparece por primera vez en la conferencia de física que tiene lugar en Calcutta en 1995. No obstante, la conferencia inaugural de este nuevo campo del conocimiento tiene lugar en Budapest en 1998 y es organizada por János Kertész e Imre Kondor