High Frequency Pairs Trading with U.S. Treasury Securities: Risks and Rewards for Hedge Funds

27 Pages Posted: 19 Jul 2004  

Purnendu Nath

London Business School

Date Written: November 2003

Abstract

This paper examines the implementation of a simple pairs trading strategy with automatic extreme risk control using the entire universe of securities in the highly liquid secondary market for U.S. government debt. It documents, from a practical viewpoint, the contrasts in the generic features of pairs trading with such securities compared with equities. The rewards emanating from the proposed strategy, after constructing an appropriate risk benchmark, are appraised using various traditional and relatively newer metrics. Using data from the repo and money market, estimates are also made of the distribution of absolute returns after accounting for financing and transaction costs.

Keywords: Arbitrage, Bonds, Extreme Risk, Hedge Funds, Liquidity, Pairs Trading, Spread Trading, Statistical Arbitrage, U.S. Treasury Securities

JEL Classification: C52, C53, E47, G14

Suggested Citation

Nath, Purnendu, High Frequency Pairs Trading with U.S. Treasury Securities: Risks and Rewards for Hedge Funds (November 2003). Available at SSRN: https://ssrn.com/abstract=565441 or http://dx.doi.org/10.2139/ssrn.565441

Purnendu Nath (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

HOME PAGE: http://phd.london.edu/pnath

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