Pairs trading: does volatility timing matter?

Nicolas Huck ()

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Abstract: Pairs trading is a dollar-neutral trading strategy. Using the components of two major stock indices, the S&P 500 and the Nikkei 225, this article deals with the performance of a pairs trading system based on various pairs selection methods (distance, stationarity, cointegration) over a 10-year period. On both markets, using a classical framework, cointegration appears superior and effective. On the U.S. market and also in Japan to a lower extent, pairs trading strategies exhibited an impressive performance during the 2008 financial crisis. Bearish periods are associated with a high level of the VIX index: the ‘investor fear gauge'. Using a modified trading system, this article examines the link between pairs trading performance and volatility/VIX timing. It is shown that for the best selection technique (cointegration), timing volatility has no economic value in a pairs trading context.

Keywords: pairs trading; trading rules; VIX timing (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (11)

Published in Applied Economics, 2015, 47 (57), pp.6239-6256. ⟨10.1080/00036846.2015.1068923⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01507986

DOI: 10.1080/00036846.2015.1068923

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