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We investigate pair trades / mean reversion amongst PSU banks
We find Long PNB - Short BOB & Long UNBK - Short BOB
Both trading at two standard deviations from historical mean
90% + probability indicated for these trades to be profitable
Two tactical trades
What is the note about – we have tested for possibility of tactical pair
trade ideas amongst our PSU bank coverage universe – SBI, PNB, BOB,
UNBK and BOI. The best pair trades are those where we find strong
evidence for mean reversion in the relative price within the pair.
What do we find – We tested for trade ideas within the 10 pairs formed
out of the 5 PSU banks in our coverage universe – SBI, PNB, BOB, BOI
and UNBK. Our data period runs from April 1 2004 to 30 March 2011. We
find two potential tactical trade opportunities from our analysis. We find
strong evidence for mean reversion between PNB-BOB and BOB-UNBK.
More interestingly, we find that these two pairs are currently at the
extreme end of their historical relative price range (close to 2 standard
deviations) and we believe there is potential profit opportunity available
when these pairs revert to their historical means.
Exhibits 11-20 detail the movement in the relative price ratio for each of
the 10 pairs since 2004. Exhibits 1-10 highlight the frequency distribution
of these price ratios over the range – mean minus 2 standard deviations
to mean plus 2 standard deviations. The price ratio chart and the
frequency distribution help us get a sense for where the relative prices
are currently and the probability for mean reversion. Below we detail this
for two pairs – PNB-BOB & BOB-UNBK - where we find evidence for
significant mean reversion.
PNB-BOB: Exhibit 11 charts the historical movement in the price ratio
between PNB & BOB. PNB-BOB pair is currently at close to -2 standard
deviations from the historical mean. If this pair was to revert back to the
mean, then, we believe there is a profitable trade in being long PNB and
short BOB. The frequency distribution indicates that there is a probability
of 97% that this pair will revert to the mean and hence the probability for
a profitable trade.
BOB-UNBK: BOB-UNBK pair is currently at mean plus 2 standard
deviations (Exhibit-16) from the historical mean. If this pair was to revert
back to the mean, then there is a profitable trade in being long UNBK and
short BOB. From exhibit 6, we can see that the relative price of BOBUNBK
is very close to mean +2 SD level and there is a probability of 90%
that this pair will revert to the mean.
In summary, given the historical relative price movement and also the
current price levels, there is a case for tactically trading out of BOB and
shifting into PNB or UNBK.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We investigate pair trades / mean reversion amongst PSU banks
We find Long PNB - Short BOB & Long UNBK - Short BOB
Both trading at two standard deviations from historical mean
90% + probability indicated for these trades to be profitable
Two tactical trades
What is the note about – we have tested for possibility of tactical pair
trade ideas amongst our PSU bank coverage universe – SBI, PNB, BOB,
UNBK and BOI. The best pair trades are those where we find strong
evidence for mean reversion in the relative price within the pair.
What do we find – We tested for trade ideas within the 10 pairs formed
out of the 5 PSU banks in our coverage universe – SBI, PNB, BOB, BOI
and UNBK. Our data period runs from April 1 2004 to 30 March 2011. We
find two potential tactical trade opportunities from our analysis. We find
strong evidence for mean reversion between PNB-BOB and BOB-UNBK.
More interestingly, we find that these two pairs are currently at the
extreme end of their historical relative price range (close to 2 standard
deviations) and we believe there is potential profit opportunity available
when these pairs revert to their historical means.
Exhibits 11-20 detail the movement in the relative price ratio for each of
the 10 pairs since 2004. Exhibits 1-10 highlight the frequency distribution
of these price ratios over the range – mean minus 2 standard deviations
to mean plus 2 standard deviations. The price ratio chart and the
frequency distribution help us get a sense for where the relative prices
are currently and the probability for mean reversion. Below we detail this
for two pairs – PNB-BOB & BOB-UNBK - where we find evidence for
significant mean reversion.
PNB-BOB: Exhibit 11 charts the historical movement in the price ratio
between PNB & BOB. PNB-BOB pair is currently at close to -2 standard
deviations from the historical mean. If this pair was to revert back to the
mean, then, we believe there is a profitable trade in being long PNB and
short BOB. The frequency distribution indicates that there is a probability
of 97% that this pair will revert to the mean and hence the probability for
a profitable trade.
BOB-UNBK: BOB-UNBK pair is currently at mean plus 2 standard
deviations (Exhibit-16) from the historical mean. If this pair was to revert
back to the mean, then there is a profitable trade in being long UNBK and
short BOB. From exhibit 6, we can see that the relative price of BOBUNBK
is very close to mean +2 SD level and there is a probability of 90%
that this pair will revert to the mean.
In summary, given the historical relative price movement and also the
current price levels, there is a case for tactically trading out of BOB and
shifting into PNB or UNBK.
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