Optimization methods for arbitraging in Indian Markets

Project Scope: Arbitraging is used to describe the trading activity that buys and sells similar securities with dissimilar pricing almost instantaneously. The only risk that arbitraging carries and is paid for is the execution risk. The reasons for the dissimilar pricing of securities, eg. stocks of the same stock trading in different exchanges or the stock price and its corresponding discounted futures price, can be due to market structure, liquidity in the particular security etc. These market inconsistencies can be seen to be against the efficient market hypothesis.

The scope of the project is not to disprove the EMH or to delve into the reasons why arbitrage opportunities exist, but to try to see if there is a consistent pattern in stock or cash future arbitrage trading in the India markets specifically between stocks trading in the NSE and BSE exchange and futures trading in the NSE exchange.

Exploratory thoughts

1.Arbitrage returns for a pair of cash and future is sticky.
2.Arbitrage returns depend on inclusion in the Stock Index – Nifty or Sensex
3.Arbitrage returns are sinusoidal for each pair, with a fixed frequency and amplitude.
4.Correlation between arbitrage pairs
5.Market movement and arbitrage

Future Scope

Build a statistical arbitrage model.