European Equity Pairs Trading: The Effect of Data Frequency on Risk and Return. Journal of Business Theory and Practice.

Lucey, M.; Walshe, D.

Abstract

This article examines an equity pairs trading strategy using daily, weekly and monthly European share price data over the period 1998 – 2007. The authors show that when stocks are matched into pairs with minimum distance between normalised historical prices, a simple trading rule based on volatility between these prices yields annualised raw returns of up to 15% for the weekly data frequency. Bootstrap results suggest returns from the strategy are attributable to skill rather than luck, while insignificant beta coefficients provide evidence that this is a market neutral strategy. Resistance of the strategy’s returns to reversal factors suggest pairs trading is fundamentally different to previously documented reversal strategies based on concepts such as mean reversion.

Citation

Lucey, M., & Walshe, D. (2013). European Equity Pairs Trading: The Effect of Data Frequency on Risk and Return. Journal of Business Theory and Practice. Journal of business theory and practice, 1(2), 329-341. https://doi.org/10.22158/jbtp.v1n2p329

• Journal Article Type: Article
• Online Publication Date: Sep 25, 2013
• Publication Date: 2013-09
• Deposit Date: Sep 14, 2016
• Journal: Journal of Business Theory and Practice
• Print ISSN: 2372-9759
• Electronic ISSN: 2329-2644
• Publisher: SCHOLINK
• Peer Reviewed: Peer Reviewed
• Volume: 1
• Issue: 2
• Pages: 329-341
• DOI: https://doi.org/10.22158/jbtp.v1n2p329
• Public URL: https://durham-repository.worktribe.com/output/1375052