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Jan 27

Arbitrage between A-shares and H-shares

Posted by abiao at 23:34 | Default | Comments(0) | Reads(9264)

In my previous post Divergence between duel listed A and H shares I mentioned the test of profitability of arbitrage between Chinese A-shares and H-shares. There are 84 firms with shares publicly tradable in the stock markets of both the mainland and Hong Kong. One would assume the stock prices are at similar level, if not, buying the cheaper stock and holding it may generate profits even after transaction costs.

A preliminary test shows this simple trading strategy (long only as short is not allowed in Chinese stock market) could generate an annualized return at 20.64% with 0.84 Sharpe ratio at a realistic transaction cost. The fund curve against a buy-hold strategy shows this strategy started working quite well in 2013 but not in 2012.
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The maximum drawdown, however, is rather large at 29.62% from April, 2011 to July, 2012. Adding stop loss should be able to make it a safer strategy.

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