(A) test of the market efficiency using statistical arbitrage strategies in the KRX equity market

Abstract

This study conducts a test of the market efficiency using statistical arbitrage strategies in the KRX equity market. In this study, momentum and contrarian strategies using monthly returns are selected as statistical arbitrage strategies. Empirical results show that momentum strategies are not successful in making statistical arbitrage, while several contrarian strategies are. Even after applying market frictions and transaction costs, some short-term contrarian long-only strategies still generate statistical arbitrage, while long-short strategies fail to do. Therefore, based on this experiment, the KRX equity market is not efficient, and there exist overreactions. However, since profits of long-only strategies are highly correlated with the market and the market condition is good during the test period, consequently we can say that their profits might be a coincidence. Therefore, in theory, the KRX equity market is not an efficient market, but in practice, the efficiency depends on the market condition.