Pairs trading in the UK equity market: risk and return

dc.contributor.authorBowen, David A.
dc.contributor.authorHutchinson, Mark C.
dc.contributor.funderIrish Research Council for the Humanities and Social Sciencesen
dc.date.accessioned2016-11-29T11:50:47Z
dc.date.available2016-11-29T11:50:47Z
dc.date.issued2014-09-11
dc.description.abstractIn 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.description.statusPeer revieweden
dc.description.versionAccepted Versionen
dc.format.mimetypeapplication/pdfen
dc.identifier.citationBowen, 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.2014.953698en
dc.identifier.doi10.1080/1351847X.2014.953698
dc.identifier.endpage1387en
dc.identifier.issn1351-847X
dc.identifier.issued14en
dc.identifier.journaltitleEuropean Journal of Financeen
dc.identifier.startpage1363en
dc.identifier.urihttps://hdl.handle.net/10468/3319
dc.identifier.volume22en
dc.language.isoenen
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.2014.953698en
dc.subjectPairs tradingen
dc.subjectStatistical arbitrageen
dc.subjectHedge fundsen
dc.subjectAsset allocationen
dc.titlePairs trading in the UK equity market: risk and returnen
dc.typeArticle (peer-reviewed)en
Files
Original bundle
Now showing 1 - 1 of 1
Loading...
Thumbnail Image
Name:
1523.pdf.pdf
Size:
405.92 KB
Format:
Adobe Portable Document Format
Description:
Accepted Version
License bundle
Now showing 1 - 1 of 1
Loading...
Thumbnail Image
Name:
license.txt
Size:
2.71 KB
Format:
Item-specific license agreed upon to submission
Description: