Intraday high-frequency pairs trading strategies for energy futures: evidence from China

Jing Luo, YuCheng Lin and Sijia Wang

Applied Economics, 2023, vol. 55, issue 56, 6646-6660

Abstract: We investigate the performance of pairs trading strategies based on Ornstein-Uhlenbeck (OU) process with jump-diffusion and regime-switching using minute-level data for five Chinese energy futures from 2 January 2020 to 30 November 2021 and compare them with traditional pairs trading strategies. Our results indicate that OU models can obtain an average return of 50.62% per annum and a Sharpe ratio of 2.63, which significantly exceed those of traditional pairs trading strategies. However, none of them could ‘win’ in every subperiod with diverse market conditions. Meanwhile, we find that introducing jump-diffusion indeed improves the performance (additional 25.37% annualized return and 1.12 Sharpe ratio). In contrast, considering more regimes does not always bring additional benefits. Robustness checks show that the superior performance of three-regime switching OU model (3RS-OUM) persists even under harsh trading conditions.

Date: 2023
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DOI: 10.1080/00036846.2022.2161993

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