Article2012

ARE PAIRS TRADING PROFITS ROBUST TO TRADING COSTS?

135 citations0/0 files storedThe Journal of Financial Research

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Financial Markets and Investment Strategies Financial Analysis and Corporate Governance Stock Market Forecasting Methods

Abstract

Abstract We examine the impact of trading costs on pairs trading profitability in the U.S. equity market, 1963 to 2009. After controlling for commissions, market impact, and short selling fees, pairs trading remains profitable, albeit at much more modest levels. Specifically, we document a risk‐adjusted return of about 30 basis points per month among portfolios of well‐matched pairs that are formed within refined industry groups. Pairs trading exhibits a lower risk and lower return profile than a short‐term reversal strategy that sorts stocks relative to their industry peers. Notably, both these types of contrarian investing are largely unprofitable after 2002.

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References

1993Common risk factors in the returns on stocks and bonds 1993Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency 1997Industry costs of equity 2003Liquidity Risk and Expected Stock Returns 1995The Limits of Arbitrage 1990Evidence of Predictable Behavior of Security Returns 2001Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk 1990When Are Contrarian Profits Due to Stock Market Overreaction?

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2018Automated trading systems statistical and machine learning methods and hardware implementation: a survey 2018Trading financial indices with reinforcement learning agents 2014Pairs trading and selection methods: is cointegration superior?2015On the determinants of pairs trading profitability 2017Pairs trading with partial cointegration 2020Enhancing a Pairs Trading strategy with the application of Machine Learning

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