Sensitivity of Profitability in Cointegration-Based Pairs Trading

Marianna Brunetti and Roberta De Luca ()
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Roberta De Luca: Bank of Italy

No 540, CEIS Research Paper from Tor Vergata University, CEIS

Abstract: The cointegrated-based pair trading crucially depends on two key parameters: the length of the formation period and the divergence signal (or opening trigger), which are generally arbitrarily or statistically determined in the literature. In this article, we perform a sensitivity analysis of the pairs trading profitability to its parametrization, employing the daily closing prices of the S&P 500 constituent stocks. We found that that not only the measures of performance (i.e. average excess returns, Sharpe ratios and percentage of positive excess returns), but also strategy characteristics and trades features (i.e. average trades’ duration and number of trades) are highly sensitive to the choice of the parameters.

Keywords: pairs trading; sensitivity analysis; formation period (search for similar items in EconPapers)
JEL-codes: C44 C55 G10 G12 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2022-04-11, Revised 2022-04-11
New Economics Papers: this item is included in nep-ore
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Working Paper: Sensitivity of profitability in cointegration-based pairs trading (2022)
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