Do, B and Faff, Robert (2012) Are pairs trading profits robust to trading costs? Journal of Financial Research, 35 (2). pp. 261-287. ISSN 0270-2592Full text not available in this repository. (Request a copy from the Strathclyde author)
We examine the impact of trading costs on pairs trading profitability in the US equity market over the period 1963-2009. After controlling for commissions, market impact and short selling fees; we find that pairs trading remains profitable, albeit at much more modest levels. Specifically, we document a risk-adjusted return of about 30 basis points (bps) per month amongst portfolios of well matched pairs that are formed within refined industry groups. Strategies that are implemented on the top 30% largest stocks produce an average alpha of 24 bps per month. Pairs trading exhibits a lower risk and lower return profile than a short-term reversal strategy that sorts stocks relative to their industry peers. Notably, both of these forms of contrarian investing are largely unprofitable in the period post 2002.
|Keywords:||pairs trading, short-term reversal, law of one price, trading costs, Accounting, Finance, Accounting|
|Subjects:||Social Sciences > Commerce > Accounting|
|Department:||Strathclyde Business School > Accounting and Finance|
|Depositing user:||Pure Administrator|
|Date Deposited:||24 Oct 2012 16:00|
|Last modified:||17 Jun 2016 03:07|