On the determinants of pairs trading profitability

Heiko Jacobs and Martin Weber

Journal of Financial Markets, 2015, vol. 23, issue C, 75-97

Abstract: We perform a large-scale empirical analysis of pairs trading, a popular relative-value arbitrage approach. We start with a cross-country study of 34 international stock markets and uncover that abnormal returns are a persistent phenomenon. We then construct a comprehensive U.S. data set to explore the sources behind the puzzling profitability in more depth. Our findings indicate that the type of news leading to pair divergence, the dynamics of investor attention as well as the dynamics of limits to arbitrage are important drivers of the strategy׳s time-varying performance.

Keywords: Pairs trading; Relative-value arbitrage; Return predictability; International stock markets; Limited attention; Limits to arbitrage (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (30)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:23:y:2015:i:c:p:75-97

DOI: 10.1016/j.finmar.2014.12.001

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