Empirical Investigation of an Equity Pairs Trading Strategy
Huafeng (Jason) Chen
University of British Columbia - Sauder School of Business
Shaojun Jenny Chen
University of British Columbia; Connor, Clark, and Lunn Investment Management
University of Michigan at Ann Arbor - Stephen M. Ross School of Business
September 27, 2012
We show that an equity pairs trading strategy generates large and significant abnormal returns. We find that this return is not driven purely by the short-term reversal of returns. The evidence related to the cross-sectional variation, the time-series variation, and the persistence of the pairs trading profits, and the determinants of return correlations is consistent with the delay in information diffusion as the driver for the pairs trading strategy. Evidence from the liquidity factor and the recent financial crisis suggests that the short-term liquidity provision is not the main cause of the pairs trading strategy.
Number of Pages in PDF File: 50working papers series
Date posted: March 17, 2009 ; Last revised: September 28, 2012
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