Publications

Type of Publication: Article in Journal

On the Determinants of Pairs Trading Profitability

Author(s):
Heiko Jacobs, Martin Weber
Title of Journal:
Journal of Financial Markets
Volume:
2015
Number of Issue:
23
pages:
75-97
Keywords:
Pairs trading, relative-value arbitrage, return predictability, international stock markets, limited attention, limits to arbitrage
Digital Object Identifier (DOI):
doi:10.1016/j.finmar.2014.12.001
Link to complete version:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2545440
Citation:
LABEL-FOR-eidrisexport

Abstract

Abstract

We perform a large-scale empirical analysis of pairs trading, a popular relative-value arbitrage approach. We start with a cross-country study of 34 international stock markets and uncover that abnormal returns are a persistent phenomenon. We then construct a comprehensive U.S. data set to explore the sources behind the puzzling profitability in more depth. Our findings indicate that the type of news leading to pair divergence, the dynamics of investor attention as well as the dynamics of limits to arbitrage are important drivers of the strategy's time-varying performance.