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Pairs Trading: Performance of a Relative Value Arbitrage Rule


Evan G. Galev


Yale School of Management

William N. Goetzmann


Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)

K. Geert Rouwenhorst


Yale School of Management - International Center for Finance

March 1999

NBER Working Paper No. w7032

Abstract:     
We test a Wall Street investment strategy known as pairs trading' with daily data over the period 1962 through 1997. Stocks are matched into pairs according to minimum distance in historical normalized price space. We test the profitability of several trading rules with six-month trading periods over the 1962-1997 period, and find average annualized excess returns of up to 12 percent for a number of self-financing portfolios of top pairs. Part of these profits may be due to market microstructure effects. Nevertheless, our historical trading profits exceed a conservative estimate of transaction costs through most of the period. We bootstrap random pairs in order to distinguish pairs trading from pure mean-reversion strategies. The bootstrap results suggest that the pairs' effect differs from previously documented mean reversion profits.

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Date posted: September 20, 2000  

Suggested Citation

Galev, Evan G. and Goetzmann, William N. and Rouwenhorst, K. Geert, Pairs Trading: Performance of a Relative Value Arbitrage Rule (March 1999). NBER Working Paper No. w7032. Available at SSRN: http://ssrn.com/abstract=227415

Contact Information

Evan G. Galev
Yale School of Management
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
William N. Goetzmann (Contact Author)
Yale School of Management - International Center for Finance ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-5950 (Phone)
203-432-8931 (Fax)
HOME PAGE: http://viking.som.yale.edu

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
K. Geert Rouwenhorst
Yale School of Management - International Center for Finance ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6046 (Phone)
203-432-8931 (Fax)
HOME PAGE: http://som.yale.edu/~geert/

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References:  18
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