On the Persistence of Cointegration in Pairs Trading

Abstract

An exploratory study is conducted to assess the persistence of cointegration among U.S. equities. In other words, if a pair of equities is found to be cointegrated in one period, is it likely that it will be found to be cointegrated in the subsequent period? An examination is performed of pairs formed from constituents of the S&P 500 during each of the calendar years 2002-2012, comprising over 860,000 pairs in total. The evidence does not support the hypothesis that cointegration is a persistent property.

Keywords: cointegration, pairs trading, quantitative finance

JEL Classification: C22, C32, C52, G12, G14