Pairs trading and idiosyncratic cash flow risk

Binh Do and Robert Faff

Accounting and Finance, 2021, vol. 61, issue 2, 3171-3206

Abstract: We uncover idiosyncratic cash flow risk as a dominant driver for pairs trading performance. The convergence probability and pairs payoff are negatively associated with pairwise idiosyncratic cash flow volatility. Further, pairs portfolio returns load negatively on market‐wide idiosyncratic cash flow volatility. This latter time‐series evidence helps explain a substantial part of the decline in pairs trading profitability in the US equity market since the 1990s. Our results are consistent with idiosyncratic risk representing a major holding cost for arbitrageurs when substitutes are close but imperfect.

Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1111/acfi.12697

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:acctfi:v:61:y:2021:i:2:p:3171-3206

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0810-5391

Access Statistics for this article

Accounting and Finance is currently edited by Robert Faff

More articles in Accounting and Finance from Accounting and Finance Association of Australia and New Zealand Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().