Evaluation of Pairs Trading Strategy at the Brazilian Financial Market

Journal of Derivatives & Hedge Funds, Vol. 15, pp. 122-136

28 Pages Posted: 19 Dec 2006 Last revised: 1 May 2010

See all articles by Marcelo Perlin

Marcelo Perlin

Escola de Administração - UFRGS

Date Written: July 23, 2009

Abstract

Pairs trading is a popular trading strategy that tries to take advantage of market inefficiencies in order to obtain profit. The idea is simple: find two stocks that move together and take long/short positions when they diverge abnormally, hoping that the prices will converge in the future. From the academic point of view of weak market efficiency theory, pairs trading strategy shouldn’t present positive performance since, according to it, the actual price of a stock reflects its past trading data, including historical prices. This leaves us with a question, does pairs trading strategy presents positive performance for the Brazilian market? The main objective of this research is to verify the performance and risk of pairs trading in the Brazilian financial market for different frequencies of the database, daily, weekly and monthly prices for the same time period. The main conclusion of this simulation is that pairs trading strategy was a profitable and market neutral strategy at the Brazilian Market. Such profitability was consistent over a region of the strategy’s parameters. The best results were found for the highest frequency (daily), which is an intuitive result.

Keywords: Pairs Trading, Quantitative Strategy, Market Efficiency

JEL Classification: G11, G10, G14

Suggested Citation

Perlin, Marcelo, Evaluation of Pairs Trading Strategy at the Brazilian Financial Market (July 23, 2009). Journal of Derivatives & Hedge Funds, Vol. 15, pp. 122-136. Available at SSRN: https://ssrn.com/abstract=952242

Marcelo Perlin (Contact Author)

Escola de Administração - UFRGS ( email )

Porto-Alegre RS
Brazil

HOME PAGE: http://sites.google.com/site/marceloperlin/

Register to save articles to
your library

Register

Paper statistics

Downloads
5,414
Abstract Views
12,921
rank
1,311
PlumX Metrics