Empirical Investigation of an Equity Pairs Trading Strategy
Huafeng (Jason) Chen, Shaojun (Jenny) Chen, Zhuo Chen, Feng Li
Management Science · 2019 · Volume 65 · Issue 1
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. The online appendix is available at https://doi.org/10.1287/mnsc.2017.2825 . This paper was accepted by Lauren Cohen, finance.
Keywords
pairs trading, pairs momentum, industry momentum, short-term reversal
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