ABSTRACT

A pair trading strategy of two shares works when there is a co-integration between the two equities. This paper uses the two-step Engle and Granger method to establish whether or not the two stock price series had a long-run relationship. Since the residual term predicted from the sample regression function between the dependent variable, PPSP, and the independent variable, PWSA, is stationary, as indicated by the ADF test, all listed stocks in CSX, a pair of equities, PPSP and PWSA, are co-integrated. During the research period, the price spread increased three times to two standard deviations. At any point, one unit of outperformance stock is short, and one unit of co-integrated ratio is long. Pair trading has an average investment return of 8.0264 percent, outperforming the weighted average return of 1.1651 percent.

 Keywords: Pair trading; CSX; Co-integration; ADF test