Pairs trading on the Johannesburg Stock Exchange

Abstract

Pairs trading strategies aim to profit from temporary deviations in some underlying relationship between the prices of two stocks. The trader takes appropriate long and short positions in the two stocks and waits for their prices to revert back to the underlying relationship or even to deviate in the opposite direction from the current deviation, at which time the trader may exit at a profit. We formulate formal trading rules that implement pairs trading strategies and discuss their profitability and risk by means of back-testing on stocks listed on the Johannesburg Stock Exchange (JSE).