A Wider Perspective on Pairs Trading

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: Pairs trading is a statistical arbitrage strategy aimed at exploiting temporary divergences in assets that move together. By taking corresponding long and short positions upon divergences, profits can be made if the assets converge. In this study, the pairs trading strategy is applied onto a novel selection of non-equity assets, namely price indices, commodities and currencies. By letting pairs indiscriminately be formed from correlated assets, we examine the possibility of achieving positive excess return using a computerised trading implementation of the strategy. The trading yielded average six-month returns of 1.56 percent (p=0.000). Furthermore, the returns from pairs comprised of same-type and different-type assets were studied, but in this case no significant differences were found.

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