APPLICATION OF EXTREME VALUE THEORY AND FUNDAMENTAL ANALYSIS IN LONG-SHORT STRATEGIES: AN ANALYSIS OF PAIR TRADINGS IN THE BRAZILIAN MARKET
DOI:
https://doi.org/10.17524/repec.v8i3.1109Keywords:
Long-Short Strategies, Extreme Value Theory, Arbitrage, Pair Trading, Fundamental AnalysisAbstract
In recent decades, the number of funds has increased which aim to explore market inefficiencies through arbitrage strategies, among which the long-short strategy stands out. A large part of the analyses used to obtain the pair tradings, however, does not consider the extreme deviations that exist in the interdependence process between the assets involved and the firms’ operational quality indicators. The Extreme Value Theory and Fundamental Analysis were used in this study to model the series of the asset pair price indices obtained based on the accounting indicator structure proposed by Piotroski (2000). These approaches permitted considering companies with positive signs of profitability, an operational capital structure and efficiency, besides distributions that are capable of capturing the extreme co-movements associated with the selected pair tradings. Based on this model, a new quantitative approach was created for the long-short strategy, called the GEV Long-Short. The obtained results suggest that the best adjustment of the extreme quantiles through the extreme value distribution can provide more refined probabilistic support for the return to the average to justify the possibility of long-short arbitrage.References
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