Pairs trading

: aplicação da distância mínima

Abstract

In this thesis, we study an arbitrage strategy known as Pairs Trading, in which we initially present a theoretical background and a revision of the main used strategies. Thereafter we replicated the strategy used in Gatev et al. (2006), with a few but significant differences, using American stocks listed at New York Stock Exchange, for a period between January 2007 and June 2016. Our work stands out for the following reasons: in the first place, we used liquidity restrictions, in each simulation period, so that the selected pairs of stocks had similar close prices, trading volume and transaction days. Secondly, we used bid/ask quotes instead of the daily close prices, so that the strategy simulation could be as similar as possible to a real application of the strategy. Lastly, we chose to select 20 pairs of stocks, per simulation period, so that our results and conclusions could be as sound and solid as possible. We obtained an average excess return of 12.89% for 6 months’ simulation periods, a total excess return of 244.93% in 9.5 years and an average excess return of 0.92% per pair.

Date of Award	31 Mar 2017
Original language	Portuguese
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Ricardo Cunha (Supervisor) & Paulo Alves (Co-Supervisor)