What is it about?
Pairs trading strategy can be used to create a market-neutral position where one can benefit from convergence in prices that have been temporarily distanced itself from each other.
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Why is it important?
Hedge funds can utilize this strategy to create a market-neutral position, i.e., a position where the market risk is removed from the investment.
Perspectives
Gatev, Goetzmann, and Rouwenhorst (RFS 2006) wrote an well-known articles about pairs trading strategy that had already been used by the practitioners for some time. They tested the strategy on US data. We, on the other hand, use data for Finland and utilize some of its unique characteristics (most notable, the existence of more than one stock class for some companies, i.e. series known as "prefs" and "ords"). In addition, we explain in plain English some of the steps in the strategy that were somewhat obscure in the original GGR article. We also decided to share the code used in the estimation as an Internet Appendix.
Professor Mika Vaihekoski
Turun Yliopisto
Read the Original
This page is a summary of: Profitability of pairs trading strategy in an illiquid market with multiple share classes, Journal of International Financial Markets Institutions and Money, December 2012, Elsevier,
DOI: 10.1016/j.intfin.2012.06.002.
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