IDEAS home Printed from
   My bibliography  Save this paper

M of a kind: A Multivariate Approach at Pairs Trading


  • Perlin, M.


Pairs trading is a popular trading strategy that tries to take advantage of market inefficiencies in order to obtain profit. Such approach, on its classical formulation, uses information of only two stocks (a stock and its pairs) in the formation of the trading signals. The objective of this paper is to suggest a multivariate version of pairs trading, which will try to create an artificial pair for a particular stock based on the information of m assets, instead of just one. The performance of three different versions of the multivariate approach was assessed for the Brazilian financial market using daily data from 2000 to 2006 for 57 assets. Considering realistic transaction costs, the analysis of performance was conducted with the calculation of raw and excessive returns, beta and alpha calculation, and the use of bootstrap methods for comparing performance indicators against portfolios build with random trading signals. The main conclusion of the paper is that the proposed version was able to beat the benchmark returns and random portfolios for the majority of the parameters. The performance is also found superior to the classic version of the strategy, Perlin (2006b). Another information derived from the research is that the proposed strategy picks up volatility from the data, that is, the annualized standard deviations of the returns are quite high. But, such event is “paid” by high positive returns at the long and short positions. This result is also supported by the positive annualized sharpe ratios presented by the strategy. Regarding systematic risk, the results showed that the proposed strategy does have a statistically significant beta, but it isn’t high in value, meaning that the relationship between return and risk for the trading rules is still attractive.

Suggested Citation

  • Perlin, M., 2007. "M of a kind: A Multivariate Approach at Pairs Trading," MPRA Paper 8309, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:8309

    Download full text from publisher

    File URL:
    File Function: original version
    Download Restriction: no

    References listed on IDEAS

    1. Fernando Fernandez-Rodriguez & Simon Sosvilla-Rivero & Maria Dolores Garcia-Artiles, 1997. "Using nearest neighbour predictors to forecast the Spanish stock market," Investigaciones Economicas, Fundación SEPI, vol. 21(1), pages 75-91, January.
    2. Park, Cheol-Ho & Irwin, Scott H., 2004. "The Profitability of Technical Analysis: A Review," AgMAS Project Research Reports 37487, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
    3. Dueker, Michael & Neely, Christopher J., 2007. "Can Markov switching models predict excess foreign exchange returns?," Journal of Banking & Finance, Elsevier, vol. 31(2), pages 279-296, February.
    4. Evan Gatev & William N. Goetzmann & K. Geert Rouwenhorst, 2006. "Pairs Trading: Performance of a Relative-Value Arbitrage Rule," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 797-827.
    5. S. Illeris & G. Akehurst, 2001. "Introduction," The Service Industries Journal, Taylor & Francis Journals, vol. 21(1), pages 1-4, January.
    6. Elroy Dimson & Massoud Mussavian, 1998. "A brief history of market efficiency," European Financial Management, European Financial Management Association, vol. 4(1), pages 91-103.
    7. Perlin, M., 2007. "Evaluation of pairs trading strategy at the Brazilian financial market," MPRA Paper 8308, University Library of Munich, Germany.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Bolgun, Evren & Kurun, Engin & Guven, Serhat, 2009. "Dynamic Pairs Trading Strategy For The Companies Listed In The Istanbul Stock Exchange," MPRA Paper 19887, University Library of Munich, Germany.
    2. Krauss, Christopher, 2015. "Statistical arbitrage pairs trading strategies: Review and outlook," FAU Discussion Papers in Economics 09/2015, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
    3. Stübinger, Johannes & Mangold, Benedikt & Krauss, Christopher, 2016. "Statistical arbitrage with vine copulas," FAU Discussion Papers in Economics 11/2016, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.

    More about this item


    pairs trading; asset allocation; quantitative strategy;

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:8309. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.