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Pairs Trading using a Cointegration Approach: An Empirical Investigation using US Stock Market data
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Resumo(s)
This dissertation will study the return of a pairs trading strategy in the US stock market. Pairs
trading is a market-neutral trading strategy that exploits the price movements between two
historically correlated securities. The purpose of this thesis is to evaluate the performance of
the cointegration approach in this market-neutral strategy and to assess if it has an edge over
other strategies. This research employs a quantitative approach, using historical price data of
50 securities from various sectors over 8 years. The study applies a cointegration approach to
identify pairs and execute trades, with the approach done with the Engle-Granger method.
Performance metrics such as returns, Sharpe ratio, and maximum drawdown are analyzed. The
findings in this study indicate that pairs trading can generate consistent returns with relatively
low volatility in stable market conditions. However, the strategy's performance deteriorates
during periods of high market volatility. This study observed that the pairs trading strategy had
better returns with cointegrated pairs and contributed to the existing literature on the
cointegration approach by offering a complete evaluation of pairs trading performance and
returns with US stock market data.
Descrição
Dissertation presented as the partial requirement for obtaining a Master's degree in Statistics and Information Management, specialization in Risk Analysis and Management
Palavras-chave
Pairs Trading Cointegration Least Squares Market-neutral strategy Statistical Arbitrage SDG 4 - Quality education SDG 8 - Decent work and economic growth