Can pairing strategies be even more profitable? : a study on pairs trading for the U.S. Russel 2000 Index constituents
Autor(a) principal: | |
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Data de Publicação: | 2014 |
Tipo de documento: | Dissertação |
Idioma: | eng |
Título da fonte: | Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
Texto Completo: | http://hdl.handle.net/10400.14/15543 |
Resumo: | Pairs trading is considered as a profitable Wall Street strategy. We analyse the influence of K-Means clustering using EPS and book-value per share ratios on pairs trading returns in the formation period, before coupling pairs, while using 3 different ranking methodologies which include the one proposed by Gatev et al. (2006). We use data from the Russel 2000 index from January 2003 to the end of June 2013, on 3.711 stocks. We find that a strategy based on the orthogonal regression approach outputs an impressive 4.35% statistically significant average excess monthly return and a Sharpe ratio of 3.23 if the K-Means clustering is applied and 20 pairs are selected, which compares to the Gatev’s strategy holding -0.54% without clustering for the same sample. We also find that the orthogonal regression method outputs on average 94 b.p. higher monthly excess returns than the average squared deviation methodology and that using the Pearson correlation coefficient for ranking pairs outputs permanently negative returns, independently of the clustering and number of pairs. Likewise, we find that the profitability of the pairs trading strategy is not dependent on the utilities sector. |
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Can pairing strategies be even more profitable? : a study on pairs trading for the U.S. Russel 2000 Index constituentsDomínio/Área Científica::Ciências Sociais::Economia e GestãoPairs trading is considered as a profitable Wall Street strategy. We analyse the influence of K-Means clustering using EPS and book-value per share ratios on pairs trading returns in the formation period, before coupling pairs, while using 3 different ranking methodologies which include the one proposed by Gatev et al. (2006). We use data from the Russel 2000 index from January 2003 to the end of June 2013, on 3.711 stocks. We find that a strategy based on the orthogonal regression approach outputs an impressive 4.35% statistically significant average excess monthly return and a Sharpe ratio of 3.23 if the K-Means clustering is applied and 20 pairs are selected, which compares to the Gatev’s strategy holding -0.54% without clustering for the same sample. We also find that the orthogonal regression method outputs on average 94 b.p. higher monthly excess returns than the average squared deviation methodology and that using the Pearson correlation coefficient for ranking pairs outputs permanently negative returns, independently of the clustering and number of pairs. Likewise, we find that the profitability of the pairs trading strategy is not dependent on the utilities sector.Kokkonen, JoniVeritati - Repositório Institucional da Universidade Católica PortuguesaSatar, Muhammad Hussein Abdul2014-11-10T10:33:01Z2014-04-0920142014-04-09T00:00:00Zinfo:eu-repo/semantics/publishedVersioninfo:eu-repo/semantics/masterThesisapplication/pdfhttp://hdl.handle.net/10400.14/15543TID:201181568enginfo:eu-repo/semantics/openAccessreponame:Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)instname:Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informaçãoinstacron:RCAAP2023-12-19T01:36:00Zoai:repositorio.ucp.pt:10400.14/15543Portal AgregadorONGhttps://www.rcaap.pt/oai/openaireopendoar:71602024-03-19T18:12:57.539712Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) - Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informaçãofalse |
dc.title.none.fl_str_mv |
Can pairing strategies be even more profitable? : a study on pairs trading for the U.S. Russel 2000 Index constituents |
title |
Can pairing strategies be even more profitable? : a study on pairs trading for the U.S. Russel 2000 Index constituents |
spellingShingle |
Can pairing strategies be even more profitable? : a study on pairs trading for the U.S. Russel 2000 Index constituents Satar, Muhammad Hussein Abdul Domínio/Área Científica::Ciências Sociais::Economia e Gestão |
title_short |
Can pairing strategies be even more profitable? : a study on pairs trading for the U.S. Russel 2000 Index constituents |
title_full |
Can pairing strategies be even more profitable? : a study on pairs trading for the U.S. Russel 2000 Index constituents |
title_fullStr |
Can pairing strategies be even more profitable? : a study on pairs trading for the U.S. Russel 2000 Index constituents |
title_full_unstemmed |
Can pairing strategies be even more profitable? : a study on pairs trading for the U.S. Russel 2000 Index constituents |
title_sort |
Can pairing strategies be even more profitable? : a study on pairs trading for the U.S. Russel 2000 Index constituents |
author |
Satar, Muhammad Hussein Abdul |
author_facet |
Satar, Muhammad Hussein Abdul |
author_role |
author |
dc.contributor.none.fl_str_mv |
Kokkonen, Joni Veritati - Repositório Institucional da Universidade Católica Portuguesa |
dc.contributor.author.fl_str_mv |
Satar, Muhammad Hussein Abdul |
dc.subject.por.fl_str_mv |
Domínio/Área Científica::Ciências Sociais::Economia e Gestão |
topic |
Domínio/Área Científica::Ciências Sociais::Economia e Gestão |
description |
Pairs trading is considered as a profitable Wall Street strategy. We analyse the influence of K-Means clustering using EPS and book-value per share ratios on pairs trading returns in the formation period, before coupling pairs, while using 3 different ranking methodologies which include the one proposed by Gatev et al. (2006). We use data from the Russel 2000 index from January 2003 to the end of June 2013, on 3.711 stocks. We find that a strategy based on the orthogonal regression approach outputs an impressive 4.35% statistically significant average excess monthly return and a Sharpe ratio of 3.23 if the K-Means clustering is applied and 20 pairs are selected, which compares to the Gatev’s strategy holding -0.54% without clustering for the same sample. We also find that the orthogonal regression method outputs on average 94 b.p. higher monthly excess returns than the average squared deviation methodology and that using the Pearson correlation coefficient for ranking pairs outputs permanently negative returns, independently of the clustering and number of pairs. Likewise, we find that the profitability of the pairs trading strategy is not dependent on the utilities sector. |
publishDate |
2014 |
dc.date.none.fl_str_mv |
2014-11-10T10:33:01Z 2014-04-09 2014 2014-04-09T00:00:00Z |
dc.type.status.fl_str_mv |
info:eu-repo/semantics/publishedVersion |
dc.type.driver.fl_str_mv |
info:eu-repo/semantics/masterThesis |
format |
masterThesis |
status_str |
publishedVersion |
dc.identifier.uri.fl_str_mv |
http://hdl.handle.net/10400.14/15543 TID:201181568 |
url |
http://hdl.handle.net/10400.14/15543 |
identifier_str_mv |
TID:201181568 |
dc.language.iso.fl_str_mv |
eng |
language |
eng |
dc.rights.driver.fl_str_mv |
info:eu-repo/semantics/openAccess |
eu_rights_str_mv |
openAccess |
dc.format.none.fl_str_mv |
application/pdf |
dc.source.none.fl_str_mv |
reponame:Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) instname:Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação instacron:RCAAP |
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Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação |
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RCAAP |
institution |
RCAAP |
reponame_str |
Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
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Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
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Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) - Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação |
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1799131806944985088 |