Visitors Now:
Total Visits:
Total Stories:
Profile image
By Quantum Blog (Reporter)
Contributor profile | More stories
Story Views

Now:
Last Hour:
Last 24 Hours:
Total:

Is pairs trading dead?

Tuesday, October 25, 2016 6:24
% of readers think this story is Fact. Add your two cents.

(Before It's News)

Bad news everybody, according to my calculations, ( which I sincerely hope are incorrect) the classical pairs trading is dead. Some people would strongly disagree, but here is what I found:

Let's take a hypothetical strategy that works on a basket of etfs:
['SPY','XLY','XLE','XLF','XLI','XLB','XLK','IWM','QQQ','DIA']
From these etfs 90 unique pairs can be made. Each pair is constructed as a market-neutral spread.

Strategy rules:
On each day, for each pair, calculate z-score based on 25-day standard deviation.
If z-score > threshold, go short, close next day
If z-score < -threshold go long, close next day

To keep it all simple, the calculation is done without any capital management (one can have up to 90 pairs in portfolio on each day) . Transaction costs are not taken into account either.

To put it simply,  this strategy tracks one-day mean reverting nature of market neutral spreads.
Here are the results simulated for several thresholds:

B4INREMOTE-aHR0cDovLzMuYnAuYmxvZ3Nwb3QuY29tLy1OdDdLY1lIZnZhdy9VT0RhTGZ6azlrSS9BQUFBQUFBQURwUS84TjBQVzgwNTVhUS9zMzIwL21yX2RlYXRoLnBuZw==

No matter what threshold is used, the strategy is highly profitable in 2008, pretty good throuh 2009 and completely worthless from early 2010.
This is not the first time I came across this change in mean-reverting behavior in etfs. No matter what I've tried, I had no luck in finding a pairs trading strategy that would work on ETFs past 2010. My conclusion is that these types of simple stat-arb models just don't cut it any more.

Report abuse

Comments

Your Comments
Question   Razz  Sad   Evil  Exclaim  Smile  Redface  Biggrin  Surprised  Eek   Confused   Cool  LOL   Mad   Twisted  Rolleyes   Wink  Idea  Arrow  Neutral  Cry   Mr. Green

Top Stories
Recent Stories

Register

Newsletter

Email this story
Email this story

If you really want to ban this commenter, please write down the reason:

If you really want to disable all recommended stories, click on OK button. After that, you will be redirect to your options page.