Can pairing strategies be even more profitable? : a study on pairs trading for the U.S. Russel 2000 Index constituents

Detalhes bibliográficos
Autor(a) principal: Satar, Muhammad Hussein Abdul
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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spelling 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
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TID:201181568
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dc.language.iso.fl_str_mv eng
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