Pairs trading

: validation of seasonality in of S&P500

Abstract

The main objective of this work is to evaluate the impact of financial market seasonality on the implementation of a trading strategy known as pairs trading. The work begins with a theoretical framework and a review of the main strategies and methodologies developed. Next, we replicate the strategy used in Gatev, et al. (2006), with some significant differences, using the 500 largest stocks listed on the New York Stock Exchange, specifically the S&P500 index rebalanced monthly, for a period from July 2005 to July 2023. Our work stands out for the following reasons: first, it is common for a pairs trading strategy to take into account the sector and the respective volume of the company, which is not the case in our study, as we want to verify if this premise makes sense. Second, we will consecutively apply three versions of the pairs trading strategy: i) a base implementation that will serve as a benchmark; ii) a pairs trading strategy with seasonality (no transactions between May and September); iii) similar to the second, but during the seasonal period, we will trade on the S&P500. The results of these different strategies were 72.66%, - 30.77%, and 61%, respectively. And an average return per pair of 0.07%, -0.04%, and 0.08% per transaction.

Date of Award	19 Jul 2024
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Paulo Alves (Supervisor)