European Equity Pairs Trading: The Effect of Data Frequency on Risk and Return

14 Pages Posted: 22 Sep 2012

See all articles by Michael E. Lucey

Michael E. Lucey

Durham Business School

Don P. Walshe

University College Cork

Date Written: June 21, 2011

Abstract

This article examines an equity pairs trading strategy using daily, weekly and monthly European share price data over the period 1998–2007. The authors shows that when stocks are matched into pairs with minimum distance between normalised historical prices, a simple trading rule based on volatility between these prices yields annualised raw returns of up to 15% for the weekly data frequency. Bootstrap results suggest returns from the strategy are attributable to skill rather than luck, while insignificant beta coefficients provide evidence that this is a market neutral strategy. Resistance of the strategy’s returns to reversal factors suggest pairs trading is fundamentally different to previously documented reversal strategies based on concepts such as mean reversion.

Keywords: Pairs trading

JEL Classification: G00

Suggested Citation

Lucey, Michael Edward and Walshe, Don P., European Equity Pairs Trading: The Effect of Data Frequency on Risk and Return (June 21, 2011). Available at SSRN: https://ssrn.com/abstract=2150217 or http://dx.doi.org/10.2139/ssrn.2150217

Michael Edward Lucey (Contact Author)

Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

Don P. Walshe

University College Cork ( email )

5 Bloomfield Terrace Western Road
Cork
Ireland

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