Pre-selection in cointegration-based pairs trading
Marianna Brunetti and
Roberta de Luca
Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) from Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi"
This paper compares the final profitability of a cointegration-based pairs trading strategy when pairs of stocks are pre-selected using seven different measures. Pre-selection matters, since the excess returns remarkably vary, in terms of both average and variability, depending on the metrics used. Differences in profitability by pre-selection metrics are retrieved even after considering commissions and cut rules, market impact, and a stricter definition of the Spread reversion to the equilibrium. Besides, the profitability of the pairs trading strategy is also found heterogeneous across the different pre-selection metrics considered in terms of exposure to the traditional risk-factors.
Keywords: pairs trading; pre-selection; cointegration; profitability (search for similar items in EconPapers)
JEL-codes: C44 C55 G10 G12 (search for similar items in EconPapers)
Pages: pages 34
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Persistent link: https://EconPapers.repec.org/RePEc:mod:wcefin:0089
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