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Pairs trading in the German stock market: is there still life in the old dog?

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  • Sascha Wilkens

Abstract

The use of statistical arbitrage, particularly pairs trading, is a well-established strategy in financial markets. Approaches to identifying and exploiting relative mispricing range from basic distance measures to complex machine learning techniques. Despite the prominence of the German stock market, in-depth studies remain scarce. This paper conducts the first comprehensive analysis of pairs trading in this market from 2000 to 2023, applying established methods and a novel ensemble approach. The results show that certain strategies achieve average monthly returns of approximately 20 basis points, though transaction costs often erode profitability. Performance improves during periods of market stress, and exposure to systematic risk factors remains limited. Sensitivity analyses confirm robustness and identify enhancements, including sector-specific pairing and alternative spread metrics.

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  • Sascha Wilkens, 2025. "Pairs trading in the German stock market: is there still life in the old dog?," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 39(2), pages 259-297, June.
    • Handle: RePEc:kap:fmktpm:v:39:y:2025:i:2:d:10.1007_s11408-025-00467-8
    DOI: 10.1007/s11408-025-00467-8
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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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