Empirical Investigation of an Equity Pairs Trading Strategy
forthcoming, Management Science
47 Pages Posted: 17 Mar 2009 Last revised: 9 Apr 2017
Date Written: April 8, 2017
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.
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