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Pairs Trading at the Prague Stock Exchange
Nušlová, Alice ; Krištoufek, Ladislav (advisor) ; Křehlík, Tomáš (referee)
Bibliographic entry: NUŠLOVÁ, Alice. Pairs Trading at the Prague Stock Exchange. Prague, 2014. Bachelor thesis, Charles University, Faculty of Social Sciences, Institute of Economic Stud- ies. Supervisor: PhDr. Ladislav Krištoufek Ph.D. Title: Pairs Trading at the Prague Stock Exchange Author: Alice Nušlová Department: Institute of Economic Studies Supervisor: PhDr. Ladislav Krištoufek Ph.D. Supervisor's e-mail address: kristoufek@ies-prague.org Abstract: Since its birth in the 1980s, pairs trading has become a widely used strategy for making profits among hedge funds and institutional investors. This technique identifies pairs of securities whose historical prices show long-run relationship, and takes advantage of their short- term relative mispricing. Profit is generated due to correcting behavior of security prices as they converge towards equilibrium value of their spread. The aim of this thesis is to compare two traditional approaches to pairs trading: cointegration and sum of squared deviations between normalized historical returns, known as distance criterion, within the Prague Stock Exchange equity market. We further investigate whether the two methods, so commonly employed in the US equity market, can be applied with similar success in the PSE. Our results reveal that the strategy using distance...
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