Pairs-Trading in the Asian ADR Market

Abstract

In this paper, we study pairs-trading strategies for 64 Asian shares listed in their local markets and listed in the U.S. as ADRs. Given that all pairs are cointegrated, they are logical choice for pairs-trading. We find that pairs-trading in this market delivers significant profits. The results are robust to different profit measures and different holding periods. For example, for a conservative investor willing to wait for a one-year period, before closing the portfolio pairs-trading positions, pairs-trading delivers annualized profits over 33%. Market frictions, such as different trading hours and thin trading for some of our pairs might make the strategies not only risky, but impossible to implement.

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