Pairs trading and selection methods: is cointegration superior?
Nicolas Huck and
Komivi Afawubo ()
Applied Economics, 2015, vol. 47, issue 6, 599-613
Abstract:
Pairs trading is a popular dollar-neutral trading strategy. This article, using the components of the S&P 500 index, explores the performance of a pairs trading system based on various pairs selection methods. Whereas large empirical applications in the literature focus on the distance method, this article also deals with well-known statistical and econometric techniques such as stationarity and cointegration which make the trading system much more demanding from a computational point of view. Trades are initiated when stocks deviate from their equilibrium. Our results confirm, after controlling for risk and transaction costs, that the distance method generates insignificant excess returns. While a pairs selection following the stationarity criterion leads to a weak performance, this article reveals that cointegration provides a high, stable and robust return.
Date: 2015
References: View complete reference list from CitEc
Citations: View citations in EconPapers (37)
Downloads: (external link)
http://hdl.handle.net/10.1080/00036846.2014.975417 (text/html)
Access to full text is restricted to subscribers.
Related works:
Working Paper: Pairs trading and selection methods: Is cointegration superior? (2015)
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:taf:applec:v:47:y:2015:i:6:p:599-613
Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAEC20
DOI: 10.1080/00036846.2014.975417
Access Statistics for this article
Applied Economics is currently edited by Anita Phillips
More articles in Applied Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().