High-Frequency Equity Pairs Trading: <i>Transaction Costs, Speed of Execution, and Patterns in Returns</i>

Bowen, David A.; Hutchinson, Mark C.; O’Sullivan, Niall

doi:10.3905/jot.2010.5.3.031

Cited by 47 publications

(30 citation statements)

References 6 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Using data from Bowen et al (2010), we provide a comparison between pairs trading at different frequencies for a one year subset of the database.…”

Section: Pairs Trading Using High Frequency Datamentioning

confidence: 99%

“…Insert Table 11 here Bowen et al (2010) Tick by Tick database and the authors limit the sample to the FTSE100 index constituents for liquidity reasons.…”

Section: Pairs Trading Using High Frequency Datamentioning

confidence: 99%

“…To date only one paper has focused exclusively on the UK equity market, using only high frequency data and a limited sample period (Bowen, Hutchinson, and O'Sullivan (2010)). Here we examine pairs trading from 1980 to 2012.…”

mentioning

confidence: 99%

See 2 more Smart Citations

Pairs trading in the UK equity market: risk and return

Bowen¹,

Hutchinson

2014

The European Journal of Finance

Self Cite

View full text Add to dashboard Cite

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

show abstract

“…Using data from Bowen et al (2010), we provide a comparison between pairs trading at different frequencies for a one year subset of the database.…”

Section: Pairs Trading Using High Frequency Datamentioning

confidence: 99%

“…Insert Table 11 here Bowen et al (2010) Tick by Tick database and the authors limit the sample to the FTSE100 index constituents for liquidity reasons.…”

Section: Pairs Trading Using High Frequency Datamentioning

confidence: 99%

See 1 more Smart Citation

Pairs trading in the UK equity market: risk and return

Bowen¹,

Hutchinson

2014

The European Journal of Finance

Self Cite

View full text Add to dashboard Cite

show abstract

“…The best pairs are commonly identified as either the ones with smallest distance measures defined as the sum of squared deviations (Gatev et al 2006, Bowen et al 2010 or using cointegration relationships (Vidyamurthy 2004, Lin et al 2006. Both the distance method and the cointegration method have their limitations.…”

Section: Sb(t) Sb(0)mentioning

confidence: 99%

“…Bowen et al (2010), which use 60 minute return series, is one of the very few that uses data with frequency higher than daily. With the availability of tick data, we are able to use five-minute series for Y (t) in the case of some highly liquid oil company stocks.…”

Section: Sb(t) Sb(0)mentioning

confidence: 99%

Intraday pairs trading strategies on high frequency data: the case of oil companies

Liu

Chang

Geman

2016

Quantitative Finance

View full text Add to dashboard Cite

This paper introduces novel 'doubly mean-reverting' processes based on conditional modeling to model spreads between pairs of stocks. Intraday trading strategies using high frequency data are proposed based on the model. This model framework and the strategies are designed to capture 'local' market inefficiencies that are elusive for traditional pairs trading strategies with daily data. Results from real data back-testing for two periods show remarkable returns, even accounting for transaction costs, with annualized Sharpe ratios of 3.9 and 7.2 over the periods June 2013-April 2015 and 2008 respectively. By choosing the particular sector of oil companies, we also confirm the observation that the commodity price is the main driver of the share prices of commodity-producing companies at times of spikes in the related commodity market.

show abstract

Pairs trading across Mainland China and Hong Kong stock markets

Zhang

Urquhart

2018

Int. J Fin Econ

View full text Add to dashboard Cite

Motivated by the rationale that market inefficiency arises from a combination of less than fully rational demand and limits to arbitrage, this paper investigates the profitability of pairs trading across Mainland China and Hong Kong on highly liquid large‐cap and midcap stocks from January 1996 to July 2017. We have three main findings. First, we find that pairs trading constrained within each market generates no significant abnormal returns. However, if investors can trade across Mainland China and Hong Kong, pairs trading is profitable after adjusting for risk and transaction costs, where the annualized abnormal return is 9% over the full sample. Second, by using a rolling‐window regression, we find that the profitability of the strategy is time‐varying. The bootstrap simulations suggest that the decline in profitability of the strategy since 2012 is due to random chance rather than poor ability of identifying mispriced stocks. However, the vast majority of profitable periods reflect the strategy's ability to choose profitable stocks rather than random chance. Third, the profitability of the strategy is somewhat sensitive to market conditions, most notably, the strategy is more profitable during longer term market turbulence. Overall, our empirical findings are consistent with the Adaptive Market Hypothesis in that the integration of financial markets and market conditions determine the level of market efficiency.

show abstract

High-Frequency Equity Pairs Trading: Transaction Costs, Speed of Execution, and Patterns in Returns

Cited by 47 publications

References 6 publications

Pairs trading in the UK equity market: risk and return

Pairs trading in the UK equity market: risk and return

Intraday pairs trading strategies on high frequency data: the case of oil companies

Pairs trading across Mainland China and Hong Kong stock markets

Contact Info

Product

Resources

About