High Frequency Pairs Trading with U.S. Treasury Securities: Risks and Rewards for Hedge Funds

Abstract:     
This paper examines the implementation of a simple pairs trading strategy with automatic extreme risk control using the entire universe of securities in the highly liquid secondary market for U.S. government debt. It documents, from a practical viewpoint, the contrasts in the generic features of pairs trading with such securities compared with equities. The rewards emanating from the proposed strategy, after constructing an appropriate risk benchmark, are appraised using various traditional and relatively newer metrics. Using data from the repo and money market, estimates are also made of the distribution of absolute returns after accounting for financing and transaction costs.

Number of Pages in PDF File: 27

Keywords: Arbitrage, Bonds, Extreme Risk, Hedge Funds, Liquidity, Pairs Trading, Spread Trading, Statistical Arbitrage, U.S. Treasury Securities

JEL Classification: C52, C53, E47, G14

working papers series