Profitability of pairs trading strategy in an illiquid market with multiple share classes

John Paul Broussard, Mika Vaihekoski

Forskningsoutput: TidskriftsbidragArtikelVetenskapligPeer review

24 Citeringar (Scopus)

Sammanfattning

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.
OriginalspråkEngelska
Referentgranskad vetenskaplig tidskriftJournal of International Financial Markets, Institutions & Money
Volym22
Utgåva5
Sidor (från-till)1188-1201
Antal sidor14
ISSN1042-4431
DOI
StatusPublicerad - 2012
MoE-publikationstypA1 Originalartikel i en vetenskaplig tidskrift

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