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Pre-selection in cointegration-based pairs trading

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Listed:
  • Marianna Brunetti
  • Roberta de Luca
Abstract
This paper compares the final profitability of a cointegration-based pairs trading strategy when pairs of stocks are pre-selected using seven different measures. Pre-selection matters, since the excess returns remarkably vary, in terms of both average and variability, depending on the metrics used. Differences in profitability by pre-selection metrics are retrieved even after considering commissions and cut rules, market impact, and a stricter definition of the Spread reversion to the equilibrium. Besides, the profitability of the pairs trading strategy is also found heterogeneous across the different pre-selection metrics considered in terms of exposure to the traditional risk-factors.

Suggested Citation

  • Marianna Brunetti & Roberta de Luca, 2022. "Pre-selection in cointegration-based pairs trading," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0089, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    • Handle: RePEc:mod:wcefin:0089
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    105. Stefano Cosma & Riccardo Ferretti & Elisabetta Gualandri & Andrea Landi & Valeria Venturelli, 2017. "How Does Financial Market Evaluate Business Models? Evidence From European Banks," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 17105, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    106. Hossein Rad & Rand Kwong Yew Low & Robert Faff, 2016. "The profitability of pairs trading strategies: distance, cointegration and copula methods," Quantitative Finance, Taylor & Francis Journals, vol. 16(10), pages 1541-1558, October.
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    More about this item

    Keywords

    pairs trading; pre-selection; cointegration; profitability;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis

    Statistics

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