Abstract

http://ssrn.com/abstract=1611623
 
 

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High Frequency Equity Pairs Trading: Transaction Costs, Speed of Execution and Patterns in Returns


David Bowen


University College Cork

Mark C. Hutchinson


University College Cork

Niall O'Sullivan


University College Cork - Department of Economics

March 1, 2010

Journal of Trading, Summer 2010, Vol. 5, No. 3, 31-38.

Abstract:     
In this paper we examine the characteristics of high frequency pairs trading using a sample of FTSE100 constituent stocks for the period January to December 2007. We show that the excess returns of the strategy are extremely sensitive both to transaction costs and speed of execution. When we specify a moderate level of transaction costs (15 basis points) the excess returns of the strategy are reduced by more than 50%. Likewise, when we implement a wait one period restriction on execution the returns of the strategy are eliminated. When we further examine the time series properties of pairs trading returns we see that the majority of returns occur in the first hour of trading. Finally, we find that the excess returns bear little exposure to traditional risk factors but are weakly related to market and reversal risk factors.

Number of Pages in PDF File: 18

Keywords: Intra Day, Pairs Trading, Reversal Strategies

JEL Classification: G19

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Date posted: July 7, 2010 ; Last revised: May 28, 2013

Suggested Citation

Bowen, David and Hutchinson, Mark C. and O'Sullivan, Niall, High Frequency Equity Pairs Trading: Transaction Costs, Speed of Execution and Patterns in Returns (March 1, 2010). Journal of Trading, Summer 2010, Vol. 5, No. 3, 31-38.. Available at SSRN: http://ssrn.com/abstract=1611623

Contact Information

David Bowen
University College Cork (UCC) ( email )
5 Bloomfield Terrace Western Road
Cork
Ireland
Mark C. Hutchinson (Contact Author)
University College Cork ( email )
O'Rahilly Building
College Road
Cork
Ireland
Niall O'Sullivan
University College Cork (UCC) - Department of Economics ( email )
School of Economics
Western Road
Cork
Ireland
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