Momentum strategies, statistical arbitrage and the market efficiency (The case of Tehran Stock Exchange)

The basic goal of this paper is to investigate the efficacy of a financial notion called Statistical Arbitrage for evaluating the efficiency of the Tehran Stock Exchange. According to this notion, a profit can be gained while its risk decreases over time and tends toward zero. In order to implement this test and construct its trading profits function, a buy-and-hold strategy is employed. Using the Momentum Strategy, nine sub-strategies were defined based on the chronology of the formation and holding periods (short-term, mid-term, and long-term). Results show that two out of nine strategies succeeded in detecting statistical arbitrage opportunities. The successful strategies then were compared via two different methods to identify the best strategy. In other words, these comparisons distinguished the quality of statistical arbitrage opportunities. While, using statistical arbitrage model we demonstrate that the existence of statistical arbitrage opportunities contradicts the Efficient Market Hypothesis in two strategies in the short-run, results of remaining momentum strategies further support the idea of dynamic efficiency, where there is a move from inefficiency toward efficiency in the long-run in Tehran Stock Exchange.