Alternate Research: Pair Trade: Buy PFC and Sell RECL
Emkay Equity Advisory
We recommend initiating a pair trade: Buy PFC (POWF.IS) @ 200-201 and Sell RECL (RECL.IS) @ 241-242. The current price ratio is 0.8340 and the target price ratio is 0.9174. The strategy has to be a rupee neutral strategy.
The chart below indicates the spread prevailing between returns of PFC vis-à-vis RECL in a one year data window. Since 12 December, 2011, RECL has surged by around 40% while PFC increased by around 34%, resulting into a negative spread of around 6%. Historically, in the last 1 year, the pair has shown convergence at around the spread of -6% to -9% on 2 occasions (as shown in chart below). We believe a similar situation to occur. The pair has already started converging in favour of PFC.
Following are the key statistics in a one year data window.
|
PFC Vs |
Current Spread |
Mean |
Standard Deviation |
Z Score |
Percentile |
|
RECL |
-5.84 |
1.33 |
5.23 |
-1.37 |
11.06 |
|
Thanks & Regards, |
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Emkay Equity Advisory | Emkay Global Financial Services Ltd. | www.emkayglobal.com |
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