Addressing the Investors Dilemma Using Pairs Trading - Co-Integrational Study of Indian Stocks

The increasing volatility in stock, commodities and foreign exchange markets compel investors and scholars to look for strategies which would immunize the investors against the unprecedented movement of the markets. Investors are often at dilemma to take correct positions to offset the risks in the market. This effort to offset market risk led to discovery of several market-neutral investment strategies of which a very popular one is Pairs Trading. It essentially involves taking opposite positions in two highly correlated assets. This study is on identifying pairs of stocks in the National Stock Exchange (NSE) which are suitable for pairs trading. The method of cointegration, both in long and short run, have been utilized in this study. Related statistical concepts of autocorrelation and stationarity have also been used in the study.