Author(s)

Zedong Cai ¹, Hanyang Li ², Tianhao Li ³, Chaojun Wu ⁴

Affiliation(s)

¹ School of Finance, Shanghai University of Finance and Economics, Shanghai, China
² School of Finance, Zhejiang University of Finance and Economics, Hangzhou, China
³ Dongfang College, Zhejiang University of Finance and Economics, Jiaxing, China
⁴ City College, Zhejiang University, Hangzhou, China

Corresponding Author

Zedong Cai

ABSTRACT

Pairs trading attempts to use the idea of relative pricing, that is, if two securities have similar characteristics, then the prices of both securities must be more or less the same. With the promotion of carbon neutrality, the green transformation of brown assets has become a hot topic. Through a series of steps including securities selection, co-integration coefficients calculation, mean-reverting examination, threshold parameters determination, threshold lines design and test set back-testing, a complete pairs trading is done by using brown and green stocks. Besides, a portfolio strategy containing 50 pairs with the strongest co-integration relationship is carried out for diversifying fundamental differential risk, and the result of back-testing is profitable.

KEYWORDS

Brown Assets, Green Assets, Co-Integration, Pairs Trading, Risk Diversification

CITE THIS PAPER

Zedong Cai, Hanyang Li, Tianhao Li, Chaojun Wu, Design of Pairs Trading Strategies for Brown and Green Assets with Risk Diversification. Financial Engineering and Risk Management (2023) Vol. 6: 20-26. DOI: http://dx.doi.org/10.23977/ferm.2023.060703.

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