A1 Vertaisarvioitu alkuperäisartikkeli tieteellisessä lehdessä
Profitability of pairs trading strategy in an illiquid market with multiple share classes
Tekijät: Broussard JP, Vaihekoski M
Kustantaja: ELSEVIER SCIENCE BV
Julkaisuvuosi: 2012
Journal: Journal of International Financial Markets, Institutions and Money
Tietokannassa oleva lehden nimi: JOURNAL OF INTERNATIONAL FINANCIAL MARKETS INSTITUTIONS & MONEY
Lehden akronyymi: J INT FINANC MARK I
Vuosikerta: 22
Numero: 5
Aloitussivu: 1188
Lopetussivu: 1201
Sivujen määrä: 14
ISSN: 1042-4431
DOI: https://doi.org/10.1016/j.intfin.2012.06.002
Tiivistelmä
We investigate the practical issues of implementing the self-financing pairs portfolio trading strategy presented by Gatev et al. (2006). We also provide new evidence on the profitability of pairs trading under different weighting structures and trade initiation conditions. Using data from the Finnish stock market over the period 1987-2008, we find pairs trading to be profitable even after allowing for a one day delay in the trade initiation after the signal. On average, the annualized return can be as high as 12.5%, though requiring trading on days a pair is traded lowers the return approximately by three percentage points. On the other hand, lowering the threshold for opening a pair is found to increase returns even after accounting for trading costs, indicating that there might be a more optimal trade initiation threshold available than that presented in earlier literature. The profits are not related to market risk. Pairs trading strategy is found to produce positive alpha during the sample period. (C) 2012 Elsevier B.V. All rights reserved.
We investigate the practical issues of implementing the self-financing pairs portfolio trading strategy presented by Gatev et al. (2006). We also provide new evidence on the profitability of pairs trading under different weighting structures and trade initiation conditions. Using data from the Finnish stock market over the period 1987-2008, we find pairs trading to be profitable even after allowing for a one day delay in the trade initiation after the signal. On average, the annualized return can be as high as 12.5%, though requiring trading on days a pair is traded lowers the return approximately by three percentage points. On the other hand, lowering the threshold for opening a pair is found to increase returns even after accounting for trading costs, indicating that there might be a more optimal trade initiation threshold available than that presented in earlier literature. The profits are not related to market risk. Pairs trading strategy is found to produce positive alpha during the sample period. (C) 2012 Elsevier B.V. All rights reserved.
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