Does Simple Pairs Trading Still Work?
Binh Huu Do
Monash University; Financial Research Network (FIRN)
Robert W. Faff
University of Queensland
July 1, 2010
Financial Analysts Journal, Vol. 66, No. 4, pp. 83-95, 2010
Despite confirming the continuing downward trend in profitability of pairs trading, this study found that the strategy performs strongly during periods of prolonged turbulence, including the recent global financial crisis. Moreover, alternative algorithms combined with other measures enhance trading profits considerably, by 22 bps a month for bank stocks.
Keywords: Portfolio Management, Equity Portfolio Management Strategies, Behavioral Finance, Limits to Arbitrage, Noise-Trader Risk, Quantitative Methods, Correlation Analysis and Regression, Time-Series Analysis
Date posted: August 11, 2010