Cointegration-based pairs trading: identifying and exploiting similar exchange-traded funds

Kezhong Chen () and Constantinos Alexiou ()
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Kezhong Chen: Cranfield University
Constantinos Alexiou: Cranfield University

Journal of Asset Management, 2025, vol. 26, issue 5, No 2, 464-488

Abstract: Abstract We examine the effectiveness of pairs trading using ETFs from 2000 to 2024, focusing on how cointegration stability affects profitability and risk. Analyzing 30 ETF pairs with different z-score thresholds, we find that lowering the threshold increases trading opportunities, boosting profits and Sharpe ratios but also raising volatility and drawdowns. Short trading windows, where cointegration holds, limit long-term profitability. While pairs trading captures short-term arbitrage, its success depends on cointegration stability. The study emphasizes the need for adaptive strategies, better pairs selection, and strong risk management for sustained profitability in changing markets.

Keywords: Pairs trading; Cointegration; Exchange-traded funds (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1057/s41260-025-00416-0

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