Spread play: China vs HK market?

If one looks at the annual performance of FXI (China index) versus EWH (HK index), we see a widening spread over the last year, but a lot of simularity in the chart patterns. I suspect these markets are cointegrated, but with a scaling factor (a difference in slope).

This article indicates that chinese will soon be able to invest in the HK market. With the huge flow of speculative money in China soon to be able to find alternative venues (such as HK), should expect to see a move of some of this buying pressure into the HK market.

A speculative play: looking to see a contracting FXI – EWH spread. Trade: buy EHW, sell FXI.

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2 Comments

Filed under investing

2 responses to “Spread play: China vs HK market?

  1. bbc

    I did co-integrated pair trading year ago. the thing I do not like is I think for swing trading, it takes much longer to be appreciated. Yet besides statistical test, there is no sound proof for the continuity of co-integration. Fundamental theory is more fragile in my opinion. There is no options spread for such trade, so leverage-up is not so realistic. double bid/ask spread to handle. (Otherwise, write one call and buy another call would be optimal way)

    • tr8dr

      Yes, trades like this can take much longer than expected. In general (not specifically in this case) one can be right about something, but you have to wait for the market to correct itself, which can be much longer than your investment horizon.

      As for cointegration, many relationships in the equities market have spurious correlation or cointegration. To enter into a pairs trade one needs to have a fundamental basis for it in addition to a view on past statistical behavior.

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