A good pair: alternative pairs-trading strategies

Richard Smith and Xun Xu
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Xun Xu: Vestcor Investment Management Corporation

Financial Markets and Portfolio Management, 2017, vol. 31, issue 1, No 1, 26 pages

Abstract: Abstract This paper studies alternative techniques for identifying stock pairs in a pairs-trading strategy over 1980–2014. We consider two main techniques: the distance approach and the cointegration approach. We also consider a range of parameterizations of the trading system design. Parameterization of the trading system matters for the profitability of pairs trading. We find that the cointegration approach, despite using an optimal in-sample parameterization, yields significant returns only in the 1980s. The distance approach performs better, producing significantly positive risk-adjusted returns in all sub-periods. However, when transaction costs are properly taken into account, the returns largely disappear in recent years.

Keywords: Stocks; Pairs trading; Investing; Arbitrage (search for similar items in EconPapers)
JEL-codes: G1 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11408-016-0280-x

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