Are pairs trading profits robust to trading costs?

Do, Binh and Faff, Robert (2012) Are pairs trading profits robust to trading costs?. Journal of Financial Research, 35 2: 261-287. doi:10.1111/j.1475-6803.2012.01317.x


Author Do, Binh
Faff, Robert
Title Are pairs trading profits robust to trading costs?
Journal name Journal of Financial Research   Check publisher's open access policy
ISSN 0270-2592
1475-6803
Publication date 2012-06
Sub-type Article (original research)
DOI 10.1111/j.1475-6803.2012.01317.x
Volume 35
Issue 2
Start page 261
End page 287
Total pages 27
Place of publication Hoboken, NJ, United States
Publisher Wiley-Blackwell Publishing
Collection year 2013
Language eng
Abstract We examine the impact of trading costs on pairs trading profitability in the U.S. equity market, 1963 to 2009. After controlling for commissions, market impact, and short selling fees, pairs trading remains profitable, albeit at much more modest levels. Specifically, we document a risk-adjusted return of about 30 basis points per month among portfolios of well-matched pairs that are formed within refined industry groups. 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 these types of contrarian investing are largely unprofitable after 2002.
Q-Index Code C1
Q-Index Status Confirmed Code
Institutional Status UQ

Document type: Journal Article
Sub-type: Article (original research)
Collections: Official 2013 Collection
UQ Business School Publications
 
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Created: Mon, 16 Jul 2012, 11:31:20 EST by Karen Morgan on behalf of UQ Business School