Selection of a Portfolio of Pairs Based on Cointegration: A Statistical Arbitrage Strategy

By João Frois Caldeira, Gulherme Valle Moura. 2013

111 citations recorded by the source corpus.

Statistical arbitrage strategies, such as pairs trading and its generalizations, rely on the construction of mean- reverting spreads with a certain degree of predictability. This paper applies cointegration tests to identify stocks to be used in pairs trading strategies. In addition to estimating long-term equilibrium and to model the resulting residuals, we select stock pairs to compose a pairs trading portfolio based on an indicator of profitability evaluated in-sample. The profitability of the strategy is assessed with data from the Sao Paulo stock exchange ranging from January 2005 to October 2012. Empirical analysis shows that the proposed strategy exhibit excess returns of 16.38% per year, Sharpe Ratio of 1.34 and low correlation with the market.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/f36e8e5f5b1e995d45f45a0d238f813e9373a79c

Citations in the corpus

• The profitability of pairs trading strategies: distance, cointegration and copula methods (2016, unknown): “For example, the strategy proposed in Vidyamurthy (2004) is not analyzed on real data and Caldeira and Moura (2013) use data from the Sao Paulo stock exchange for a period of less than 7 years. Due to the properties of copulas in allowing the freedom to select marginal distributions and to flexibly ”
• Statistical arbitrage pairs trading strategies: Review and outlook (2017, unknown): “Finally, the study is missing any attempt to explain the returns by their loadings on standard risk factors as in GGR. Caldeira and Moura (2013) apply the univariate cointegration approach to the 50 most liquid stocks of the Brazilian stock index IBovespa.”