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Empirical Investigation of an Equity Pairs Trading Strategy

Author

Listed:
  • Huafeng (Jason) Chen

    (PBC School of Finance, Tsinghua University, Beijing 100083, China)

  • Shaojun (Jenny) Chen

    (Connor, Clark and Lunn Investment Management, Vancouver, British Columbia V6E 4M3, Canada)

  • Zhuo Chen

    (PBC School of Finance, Tsinghua University, Beijing 100083, China)

  • Feng Li

    (Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University, Shanghai 200030, China)

Abstract

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.

Suggested Citation

  • Huafeng (Jason) Chen & Shaojun (Jenny) Chen & Zhuo Chen & Feng Li, 2019. "Empirical Investigation of an Equity Pairs Trading Strategy," Management Science, INFORMS, vol. 65(1), pages 370-389, January.
    • Handle: RePEc:inm:ormnsc:v:65:y:2019:i:1:p:370-389
    DOI: 10.1287/mnsc.2017.2825
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Poutré, Cédric & Dionne, Georges & Yergeau, Gabriel, 2023. "International high-frequency arbitrage for cross-listed stocks," International Review of Financial Analysis, Elsevier, vol. 89(C).
    2. Harvey, Campbell R. & Liu, Yan, 2021. "Lucky factors," Journal of Financial Economics, Elsevier, vol. 141(2), pages 413-435.
    3. Binh Do & Robert Faff, 2021. "Pairs trading and idiosyncratic cash flow risk," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(2), pages 3171-3206, June.
    4. Chenyanzi Yu & Tianyang Xie, 2021. "Multivariate Pair Trading by Volatility & Model Adaption Trade-off," Papers 2106.09132, arXiv.org.
    5. Yi, Biao & Xiang, Xueman, 2023. "Pair analyst coverage and return comovement: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    6. Chen, Zilin & Guo, Li & Tu, Jun, 2021. "Media connection and return comovement," Journal of Economic Dynamics and Control, Elsevier, vol. 130(C).
    7. Fernando Caneo & Werner Kristjanpoller, 2021. "Improving statistical arbitrage investment strategy: Evidence from Latin American stock markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 4424-4440, July.

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