Pairs Trading in the German Stock Market: Is There Still Life in the Old Dog?

50 Pages Posted: 26 Apr 2024 Last revised: 2 Jan 2025

Date Written: December 27, 2024

Abstract

The use of statistical arbitrage in financial markets, particularly the trading of 'pairs', is a well-established field in both theory and practice. The methods to detect and exploit suspected relative mispricing between assets range from basic distance measures to complex machine learning-based pattern recognition. In-depth analyses focusing on the German stock market are surprisingly rare. This paper applies a full range of approaches – including a proposed 'ensemble' method – to this liquid and easily accessible market from 2000 through 2023. The analysis demonstrates that specific strategies yield average portfolio returns of approximately 20 bps per month relative to employed capital, although transaction costs can erode this advantage. Performance during periods of market stress tends to be stronger, and the intended limited exposure to systematic risk factors is largely confirmed. Sensitivity analyses underscore the robustness of the findings to design and calibration features, identifying potential strategy enhancements such as sector-specific pairing, alternative spread metrics as well as shorter calibration and trading periods.

Keywords: statistical arbitrage, pairs trading, relative value, excess returns, DAX

JEL Classification: G14, G17

Suggested Citation

Wilkens, Sascha, Pairs Trading in the German Stock Market: Is There Still Life in the Old Dog? (December 27, 2024). Available at SSRN: https://ssrn.com/abstract=4807915 or http://dx.doi.org/10.2139/ssrn.4807915

Sascha Wilkens (Contact Author)

Independent

No Address Available

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