Abstract

https://ssrn.com/abstract=1796064
 
 

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How Some Bankers Made a Million by Trading Just Two Securities?


Kalle Rinne


Luxembourg School of Finance

Matti Suominen


Aalto University School of Business

December 13, 2016


Abstract:     
In this paper, we study a pair trading strategy that utilizes short-term return reversals in the stock market. Using U.S. data, we show that returns to our pair trading strategy exceed reasonable estimates for transaction costs. The strategy also generates positive alpha when controlling for the standard risk factors. Second, using transaction level data from Finland, focusing on a popular pair, we provide evidence that these kinds of pair trading returns are compensation from providing liquidity. On the days when the expected returns to our pair trading strategy are the highest, the trading volume is abnormally high and, judging from active brokers’ net trades, nearly 45% of all brokers (or their customers) engage in pair trading in accordance with our trading strategy. These brokers are mainly counterparties to few brokers that trade large quantities of stocks inconsistent with our strategy.

Number of Pages in PDF File: 31

Keywords: pair trading, short-term return reversals, liquidity provision

JEL Classification: G10, G12, G23


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Date posted: March 27, 2011 ; Last revised: December 19, 2016

Suggested Citation

Rinne, Kalle and Suominen, Matti, How Some Bankers Made a Million by Trading Just Two Securities? (December 13, 2016). Available at SSRN: https://ssrn.com/abstract=1796064 or http://dx.doi.org/10.2139/ssrn.1796064

Contact Information

Kalle Rinne
Luxembourg School of Finance ( email )
4 Rue Albert Borschette
Luxembourg, L-1246
Luxembourg
Matti Suominen (Contact Author)
Aalto University School of Business ( email )
PO Box 1210
FI-00101 Helsinki
Finland
+358-50-5245678 (Phone)
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