Is Daily Pairs Trading of ETF-Stocks Profitable?

9 Pages Posted: 1 Aug 2016

Date Written: July 30, 2016

Abstract

Pairs trading is a venerable trading strategy. There is agreement that it worked fine in the far past. But it is less clear if it still profitable today. In this working paper the universe of eligible pairs is defined by the holdings of a given ETF. It is shown that the stocks must be from ETFs which select high-quality, low-volatility stocks. The usual closeness measure presented in the literature performs poor. The paper presents a simple and clearly superior alternative based on zero-crossings. The strategy performs with the correct universe and the improved pairs selection rule before trading costs quite fine. It depends on the assumed trading costs if this is also in real-trading life the case

Keywords: Pairs Trading, ETF, Zero-Crossings

Suggested Citation

Donninger, Chrilly, Is Daily Pairs Trading of ETF-Stocks Profitable? (July 30, 2016). Available at SSRN: https://ssrn.com/abstract=2816288 or http://dx.doi.org/10.2139/ssrn.2816288

Chrilly Donninger (Contact Author)

Nimzowerkstatt OEG ( email )

Altmelon 110
Arbesbach, Lower-Austria A-3925
Austria

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