Pre-selection in Cointegration-based Pairs Trading

Marianna Brunetti and Roberta De Luca ()
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Roberta De Luca: Bank of Italy

No 500, CEIS Research Paper from Tor Vergata University, CEIS

Abstract: 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: 31 pages
Date: 2020-06-24, Revised 2021-03-10
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Related works:
Journal Article: Pre-selection in cointegration-based pairs trading (2023)
Working Paper: Pre-selection in cointegration-based pairs trading (2022)
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