Feb 3

## A simple strategy between A-shares and H-shares

Posted by abiao at 02:12 | Code » R/Splus | Comments(5) | Reads(21938)
A similar article was posted at the sub-personal blog before and I paste it here in case someone is interested.

At the moment there are 84 firms listed at both A (Shanghai and Shenzhen) and H (Hongkong) stock markets, according to the law of one price, the stock prices of these firms should be at similar level. However, there are huge differences, without considering exchange rate (1 RMB = 1.28 HK\$), the ratio of the price in A market to the price in H market for a same firm is as low as 52.72% and as high as 617.59% as of 02/03/2014. Is the difference mean reverting? If yes, we would expect the stock traded cheaper in A market to go up, and vice versa. So can we make profit by long the stocks with large differences?

Rigorous statistical method should be undertaken to examine whether the ratio is indeed mean reverting. For simplicity, I construct a trading strategy that each week, I go long at the opening price the stock in A market that has the smallest price ratio  of previous week, hold it one week and sell it at the weekly closing price. Short trading is not allowed for individual investor in A market. Stop loss is set arbitrarily at 5%. Transaction cost is 0.18% per trading.

The results for this simple strategy from 02.2013 to 01.2014 are:
Annualized Return         0.2070
Annualized Std Dev        0.2545
Annualized Sharpe          0.8133
Maximum Drawdown
From     Trough         To   Depth Length To Trough Recovery
1 2013-09-13 2013-12-13           -0.1275     19        12       NA
2 2013-08-16 2013-08-23 2013-09-06 -0.0566      4         2        2
3 2013-03-22 2013-04-19 2013-05-03 -0.0488      5         3        2
4 2013-07-12 2013-07-12 2013-07-19 -0.0374      2         1        1
5 2013-05-31 2013-05-31 2013-07-05 -0.0229      6         1        5
The fund curve

Lower line is the return for a buy-and-hold strategy of all 84 firms.

Considering the fact that 2013 is a gloomy year for A market and this strategy is long only, the performance is not bad at all. Comments are welcomed

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What is the reason you don't consider exchange rate? For an effective comparison you have to consider it, do you agree?
abiao replied on 2014/02/03 09:44
Sure, I agree, it is just an illustration. Also the ratios across firms are the same regardless of exchange rate.
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