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Pairs Trading: Evaluation of profitability and risks on the Swedish stock market

Lisev, Pavel LU and Schurer, Marc LU (2015) NEKP03 20151
Department of Economics
Abstract
The turbulent market environment experienced over the last decades has attracted the broad interest of institutional and retail investors towards non-directional and absolute return investment strategies. The scope of this paper mainly concerns the investigation of whether a pairs trading strategy based on the cointegration approach generates excess returns on the Swedish equity market or fails to meet initial expectations. This is enhanced by an assessment of the volatility exposure relative to an investment in the corresponding benchmark. In this research, a comprehensive analysis of the pairs trading strategy is performed by (1) implementing a long-term rolling window backtest applied on the OMX, (2) a corresponding scenario analysis of... (More)
The turbulent market environment experienced over the last decades has attracted the broad interest of institutional and retail investors towards non-directional and absolute return investment strategies. The scope of this paper mainly concerns the investigation of whether a pairs trading strategy based on the cointegration approach generates excess returns on the Swedish equity market or fails to meet initial expectations. This is enhanced by an assessment of the volatility exposure relative to an investment in the corresponding benchmark. In this research, a comprehensive analysis of the pairs trading strategy is performed by (1) implementing a long-term rolling window backtest applied on the OMX, (2) a corresponding scenario analysis of the Swedish stock market including three dierent market environments, (3) an investigation of dierent in-sample pairs selection criteria and their respective impact, (4) an extended analysis of the strategy on the EUROSTOXX50 and DAX30 to support the robustness of the obtained outcomes. The empirical results suggest that the pairs trading technique is in fact protable and superior in terms of return and risk relative to its benchmarks. (Less)
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author
Lisev, Pavel LU and Schurer, Marc LU
supervisor
organization
course
NEKP03 20151
year
type
H2 - Master's Degree (Two Years)
subject
keywords
cointegration, pairs trading, market-neutrality, rolling window backtest, OMX
language
English
id
7370318
date added to LUP
2015-06-29 13:04:17
date last changed
2015-06-29 13:04:17
@misc{7370318,
  abstract     = {The turbulent market environment experienced over the last decades has attracted the broad interest of institutional and retail investors towards non-directional and absolute return investment strategies. The scope of this paper mainly concerns the investigation of whether a pairs trading strategy based on the cointegration approach generates excess returns on the Swedish equity market or fails to meet initial expectations. This is enhanced by an assessment of the volatility exposure relative to an investment in the corresponding benchmark. In this research, a comprehensive analysis of the pairs trading strategy is performed by (1) implementing a long-term rolling window backtest applied on the OMX, (2) a corresponding scenario analysis of the Swedish stock market including three dierent market environments, (3) an investigation of dierent in-sample pairs selection criteria and their respective impact, (4) an extended analysis of the strategy on the EUROSTOXX50 and DAX30 to support the robustness of the obtained outcomes. The empirical results suggest that the pairs trading technique is in fact protable and superior in terms of return and risk relative to its benchmarks.},
  author       = {Lisev, Pavel and Schurer, Marc},
  keyword      = {cointegration,pairs trading,market-neutrality,rolling window backtest,OMX},
  language     = {eng},
  note         = {Student Paper},
  title        = {Pairs Trading: Evaluation of profitability and risks on the Swedish stock market},
  year         = {2015},
}