Empirical Investigation of an Equity Pairs Trading Strategy

We show that an equity pairs trading strategy generates large and significant abnormal returns. We find that two components of the trading signal (i.e., short-term reversal and pairs momentum) have different dynamic and cross-sectional properties. The pairs momentum is largely explained by the one-m...

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Veröffentlicht in:Management science 2019-01, Vol.65 (1), p.370-389
Hauptverfasser: Chen, Huafeng (Jason), Chen, Shaojun (Jenny), Chen, Zhuo, Li, Feng
Format: Artikel
Sprache:eng
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Zusammenfassung:We show that an equity pairs trading strategy generates large and significant abnormal returns. We find that two components of the trading signal (i.e., short-term reversal and pairs momentum) have different dynamic and cross-sectional properties. The pairs momentum is largely explained by the one-month version of the industry momentum. Therefore, the pairs trading profits are largely explained by the short-term reversal and a version of the industry momentum. The online appendix is available at https://doi.org/10.1287/mnsc.2017.2825 . This paper was accepted by Lauren Cohen, finance.
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.2017.2825