Pairs trading in the UK equity market: risk and return

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dc.contributor.author Bowen, David A.
dc.contributor.author Hutchinson, Mark C.
dc.date.accessioned 2016-11-29T11:50:47Z
dc.date.available 2016-11-29T11:50:47Z
dc.date.issued 2014-09-11
dc.identifier.citation Bowen, D. A. and Hutchinson, M. C. (2014) ‘Pairs trading in the UK equity market: risk and return’, The European Journal of Finance, 22(14), pp. 1363-1387. doi: 10.1080/1351847X.2014.953698 en
dc.identifier.volume 22 en
dc.identifier.issued 14 en
dc.identifier.startpage 1363 en
dc.identifier.endpage 1387 en
dc.identifier.issn 1351-847X
dc.identifier.uri http://hdl.handle.net/10468/3319
dc.identifier.doi 10.1080/1351847X.2014.953698
dc.description.abstract In this paper, we provide the first comprehensive UK evidence on the profitability of the pairs trading strategy. Evidence suggests that the strategy performs well in crisis periods, so we control for both risk and liquidity to assess performance. To evaluate the effect of market frictions on the strategy, we use several estimates of transaction costs. We also present evidence on the performance of the strategy in different economic and market states. Our results show that pairs trading portfolios typically have little exposure to known equity risk factors such as market, size, value, momentum and reversal. However, a model controlling for risk and liquidity explains a far larger proportion of returns. Incorporating different assumptions about bid-ask spreads leads to reductions in performance estimates. When we allow for time-varying risk exposures, conditioned on the contemporaneous equity market return, risk-adjusted returns are generally not significantly different from zero. en
dc.format.mimetype application/pdf en
dc.language.iso en en
dc.rights © 2014, Taylor & Francis. This is the Accepted Manuscript of an article published by Taylor & Francis in European Journal of Finance on 11 September, 2014, available online: http://www.tandfonline.com/10.1080/1351847X.2014.953698 en
dc.subject Pairs trading en
dc.subject Statistical arbitrage en
dc.subject Hedge funds en
dc.subject Asset allocation en
dc.title Pairs trading in the UK equity market: risk and return en
dc.type Article (peer-reviewed) en
dc.internal.authorcontactother Mark Hutchinson, Accounting, Finance and Information Systems, University College Cork, Cork, Ireland +353-21-490-3000 Email: m.hutchinson@ucc.ie en
dc.internal.availability Full text available en
dc.description.version Accepted Version en
dc.contributor.funder Irish Research Council for the Humanities and Social Sciences en
dc.description.status Peer reviewed en
dc.identifier.journaltitle European Journal of Finance en
dc.internal.IRISemailaddress m.hutchinson@ucc.ie


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