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

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

18 Pages Posted: 7 Jul 2010 Last revised: 28 May 2013

David Bowen

University College Cork

Mark C. Hutchinson

University College Cork

Niall O'Sullivan

University College Cork

Date Written: March 1, 2010

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.

Keywords: Intra Day, Pairs Trading, Reversal Strategies

JEL Classification: G19

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: https://ssrn.com/abstract=1611623

David Bowen

University College Cork ( 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 ( email )

Department of Economics
University College Cork
Cork, n/a
Ireland

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