Does Pair Trading Still Work During Extreme Events? A Comprehensive Empirical Evidence from Chinese Stock Market

Yufei Sun ()
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Yufei Sun: Faculty of Economic Sciences, University of Warsaw

No 2025-23, Working Papers from Faculty of Economic Sciences, University of Warsaw

Abstract: This study evaluates the performance of pairs trading strategies in the Chinese stock market across extreme market environments, including the Financial Crisis, Bull and Bear phases, and the COVID-19 period. Using a comprehensive stock dataset and incorporating transaction costs, we find that most portfolios deliver near-zero excess returns after costs. However, in volatile conditions—especially during the Financial Crisis—top-performing portfolios achieved monthly returns up to 156 basis points. The strategy underperforms in stable or bullish markets with fewer mean-reversion opportunities. COVID-19 introduced challenges that further reduced profitability. Results highlight the critical role of transaction costs and the importance of advanced pair selection methods, such as combining the Sum of Squared Deviations (SSD), Hurst exponent, and the Number of Zero Crossings (NZC), which consistently outperform traditional approaches. While generally unprofitable, pairs trading can succeed under specific market regimes, offering insights into risk management and strategy adaptation.

Keywords: Pairs Trading; Statistical Arbitrage; Sum of Squared Deviations; Hurst Exponent; Chinese Stock Market (search for similar items in EconPapers)
JEL-codes: C58 C63 G11 G14 G17 (search for similar items in EconPapers)
Pages: 132 pages
Date: 2025
New Economics Papers: this item is included in nep-cna, nep-rmg and nep-sea
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