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Stock Market Spread Trading: Argentina and Brazil Stock Indices

Brazil is the largest stock market in South America, whereas Argentina is one of the smallest. Nonetheless, the most important stock indices representing these markets (the Brazil Bovespa and the Argentinian Merval) are highly correlated with two-way Granger causality. This feature facilitates trading of the spread between these two markets, measured as the ratio of the Bovespa to the Merval. We identify the presence of a temporal fractal structure in daily changes in this ratio using statistical techniques based on rescaled range analysis after accommodating short-term autocorrelation. This series has episodes of both positive and negative dependence, though the positive dependent relationship appears to be dominant. When a simple trading rule, based upon the Hurst coefficient, is applied we find that episodes of fractality may be exploited by traders. Under some circumstances these strategies are more profitable than economic gains from simple moving average systems, which exploit the autocorrelation structure of the series.