TY  - JOUR
AU  - Galev,Evan G.
AU  - Goetzmann,William N.
AU  - Rouwenhorst,K. Geert
TI  - Pairs Trading:  Performance of a Relative Value Arbitrage Rule
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7032
PY  - 1999
Y2  - March 1999
UR  - http://www.nber.org/papers/w7032
L1  - http://www.nber.org/papers/w7032.pdf
N1  - Author contact info:
William N. Goetzmann
School of Management
Yale University
Box 208200
New Haven, CT 06520-8200
Tel: 203/432-5950
Fax: 203/432-3003
E-Mail: william.goetzmann@yale.edu

K. Geert Rouwenhorst
School of Management
Yale University
Box 208200
New Haven, CT 06520-8200
E-Mail: k.rouwenhorst@yale.edu
AB  - We test a Wall Street investment strategy known as  pairs trading' with daily data over the period 1962 through 1997. Stocks are matched into pairs according to minimum distance in historical normalized price space.  We test the profitability of several trading rules with six-month trading periods over the 1962-1997 period, and find average annualized excess returns of up to 12 percent for a number of self-financing portfolios of top pairs.  Part of these profits may be due to market microstructure effects.  Nevertheless, our historical trading profits exceed a conservative estimate of transaction costs through most of the period.  We bootstrap random pairs in order to distinguish pairs trading from pure mean-reversion strategies.  The bootstrap results suggest that the  pairs' effect differs from previously documented mean reversion profits.
ER  -