Evaluation of pairs-trading strategy at the Brazilian financial market

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Pairs-trading is a popular trading strategy that tries to take advantage of market inefficiencies in order to obtain profit. The idea is simple: find two stocks that move together and take long/short positions when they diverge abnormally, hoping that the prices will converge in the future. From the academic point of view of weak market efficiency theory, pairs-trading strategy should not present positive performance, as, according to it, the actual price of a stock reflects its past trading data, including historical prices. This leaves us with a question: does pairs-trading strategy present positive performance for the Brazilian market? The main objective of this research is to verify the performance and risk of pairs-trading in the Brazilian financial market for different frequencies of the database: daily, weekly and monthly prices for the same time period. The main conclusion of this simulation is that pairs-trading strategy was a profitable and market-neutral strategy at the Brazilian market. Such profitability was consistent over a region of the strategy’s parameters. The best results were found for the highest frequency (daily), which is an intuitive result.

Journal of Derivatives and Hedge Funds

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