Empirical Investigation of an Equity Pairs Trading Strategy

forthcoming, Management Science

47 Pages Posted: 17 Mar 2009 Last revised: 9 Apr 2017

See all articles by Huafeng (Jason) Chen

Huafeng (Jason) Chen

Fudan University - Fanhai International School of Finance (FISF)

Shaojun Jenny Chen

Connor, Clark, and Lunn Investment Management; University of British Columbia (UBC)

Zhuo Chen

Tsinghua University; Tsinghua University - PBC School of Finance

Feng Li

Shanghai Advanced Institute of Finance, Shanghai Jiaotong University

Date Written: April 8, 2017

Abstract

We show that an equity pairs trading strategy generates large and significant abnormal returns. We find that two components of the trading signal (short term reversal and pairs momentum) have different dynamic and cross-sectional properties. The pairs momentum is largely explained by the one month version of the industry momentum. Therefore, the pairs trading profits are largely explained by the short term reversal and a version of the industry momentum.

Suggested Citation

Chen, Huafeng (Jason) and Chen, Shaojun Jenny and Chen, Zhuo and Li, Feng, Empirical Investigation of an Equity Pairs Trading Strategy (April 8, 2017). forthcoming, Management Science. Available at SSRN: https://ssrn.com/abstract=1361293 or http://dx.doi.org/10.2139/ssrn.1361293

Huafeng (Jason) Chen (Contact Author)

Fudan University - Fanhai International School of Finance (FISF) ( email )

220 Handan Road
Shanghai, 200433
China

Shaojun Jenny Chen

Connor, Clark, and Lunn Investment Management

2200 - 1111 West Georgia Street
Vancouver, V6T 1Z4
Canada

University of British Columbia (UBC) ( email )

2329 West Mall
Vancouver, British Columbia BC V6T 1Z4
Canada

Zhuo Chen

Tsinghua University ( email )

43 Chengfu Road
Beijing, 100083
China

Tsinghua University - PBC School of Finance

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Feng Li

Shanghai Advanced Institute of Finance, Shanghai Jiaotong University ( email )

211 West Huaihai Road
Shanghai, Shanghai 200030
China

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