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Article Dans Une Revue Applied Economics Année : 2015

Pairs trading: does volatility timing matter?

Résumé

Pairs trading is a dollar-neutral trading strategy. Using the components of two major stock indices, the S&P 500 and the Nikkei 225, this article deals with the performance of a pairs trading system based on various pairs selection methods (distance, stationarity, cointegration) over a 10-year period. On both markets, using a classical framework, cointegration appears superior and effective. On the U.S. market and also in Japan to a lower extent, pairs trading strategies exhibited an impressive performance during the 2008 financial crisis. Bearish periods are associated with a high level of the VIX index: the ‘investor fear gauge’. Using a modified trading system, this article examines the link between pairs trading performance and volatility/VIX timing. It is shown that for the best selection technique (cointegration), timing volatility has no economic value in a pairs trading context.
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Dates et versions

hal-01507986 , version 1 (13-04-2017)

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Nicolas Huck. Pairs trading: does volatility timing matter?. Applied Economics, 2015, 47 (57), pp.6239-6256. ⟨10.1080/00036846.2015.1068923⟩. ⟨hal-01507986⟩
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