Improving Pairs Trading

33 Pages Posted: 4 May 2014

See all articles by Tiago Almeida

Tiago Almeida

Independent; Catholic University of Portugal (UCP)

Date Written: October 3, 2011

Abstract

This paper tests the Pairs Trading strategy as proposed by Gatev, Goetzmann and Rouwenhorts (2006). It investigates if the profitability of pairs opening after an above average volume day in one of the assets are distinct in returns characteristics and if the introduction of a limit on the days the pair is open can improve the strategy returns. Results suggest that indeed pairs opening after a single sided shock are less profitable and that a limitation on the numbers of days a pair is open can significantly improve the profitability by as much as 30 basis points per month.

Keywords: Pairs Trading, Volume, Stop Loss

JEL Classification: G14

Suggested Citation

Almeida, Tiago, Improving Pairs Trading (October 3, 2011). Available at SSRN: https://ssrn.com/abstract=2432061 or http://dx.doi.org/10.2139/ssrn.2432061

Tiago Almeida (Contact Author)

Independent ( email )

No Address Available

Catholic University of Portugal (UCP) ( email )

Palma de Cima
Lisboa, 1649-023
Portugal

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