Pairs Trading in US Equities: Performance Across Market Regimes

Summary

This study evaluates whether widely used pairs trading rules remain effective in modern US equity markets. It applies both distance-based and cointegration-based methods to equities over the period from 1990 to 2020, including the Covid-19 crisis. The strategy seeks to profit from mean reversion between securities whose prices move together, and the analysis considers whether parameter tuning changes its results.

The reported evidence is mixed: overall, the strategy does not outperform the market benchmark, even after hyperparameter tuning, but it performs strongly during bear markets. The authors also find a strong relationship between market factors and the strategy’s optimal parameter choices, suggesting that settings suited to one market environment may not suit another. These findings caution against assuming that conventional pairs trading rules provide persistent excess returns. The document offers no detailed performance figures, implementation choices, or factor definitions, so it does not establish which settings should be used in practice or whether the reported patterns generalize beyond the studied US equities and period.

Key ideas

• The study evaluates distance and cointegration approaches to pairs trading in US equities from 1990 to 2020.
• The strategy does not beat the market benchmark overall, including after hyperparameter tuning.
• Pairs trading performs strongly during bear markets in the reported analysis.
• Market factors are associated with the strategy’s optimal parameter choices.
• The results suggest that pairs trading settings may need adjustment for changing market conditions.

Tags

# Gold Standard Pairs Trading Rules: Are They Valid?


# Gold Standard Pairs Trading Rules: Are They Valid?









Pairs trading is a strategy based on exploiting mean reversion in prices of securities. It has been shown to generate significant excess returns, but its profitability has dropped significantly in recent periods. We employ the most common distance and cointegration methods on US equities from 1990 to 2020 including the Covid-19 crisis. The strategy overall fails to outperform the market benchmark even with hyperparameter tuning, but it performs very strongly during bear markets. Furthermore, we demonstrate that market factors have a strong relationship with the optimal parametrization for the strategy, and adjustments are appropriate for modern market conditions.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.