Pairs Trading, Technical Analysis, and Data Snooping: A Two-layer Manipulation-proof Performance Approach

70 Pages Posted: 8 Mar 2018 Last revised: 10 May 2019

See all articles by Ioannis Psaradellis

Ioannis Psaradellis

University of St Andrews School of Economics and Finance

Jason Laws

University of Liverpool - Accounting and Finance Division

Athanasios A. Pantelous

Monash University - Department of Econometrics & Business Statistics

Georgios Sermpinis

University of Glasgow

Date Written: May 6, 2019

Abstract

Traders typically lock in gains and gamble on losses, as prospect theory suggests. The disarmingly simple idea behind pairs trading can lead to doubling strategies with potentially delusive performance. In this paper, we develop a two-layer approach for evaluating the out-of-sample performance of technical analysis on frequently traded pairs using daily data from 1990 to 2016, while testing for presence of manipulative concave payoffs. The empirical evidence suggests that any short-term outperformance is mainly manipulation-free and rejects the existence of a uniformly monotonic downward trend over the years. For commodity spreads, the evidence of significant and skilled returns appears stronger.

Keywords: Pairs Trading, Technical Analysis, Data Snooping, Transaction Costs

JEL Classification: C12, C53, G11, G14, G15

Suggested Citation

Psaradellis, Ioannis and Laws, Jason and Pantelous, Athanasios A. and Sermpinis, Georgios, Pairs Trading, Technical Analysis, and Data Snooping: A Two-layer Manipulation-proof Performance Approach (May 6, 2019). Available at SSRN: https://ssrn.com/abstract=3128788 or http://dx.doi.org/10.2139/ssrn.3128788

Ioannis Psaradellis (Contact Author)

University of St Andrews School of Economics and Finance ( email )

Castlecliffe, The Scores
St Andrews, KY16 9AR
United Kingdom

Jason Laws

University of Liverpool - Accounting and Finance Division ( email )

United Kingdom

Athanasios A. Pantelous

Monash University - Department of Econometrics & Business Statistics ( email )

Wellington Road
Clayton, Victoria 3168
Australia

Georgios Sermpinis

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

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