Swing Trading Signals


Since 2013

  • 100% Quantified, data-driven and Backtested
  • We always show our results!
  • Signals every day via our site or email
  • Cancel at any time!

Supercointegrated

Last Updated on 10 February, 2024 by Rejaul Karim

On an exploration of pairs trading dynamics, the research paper titled “Supercointegrated” by Isabel Figuerola-Ferretti, Pedro Serrano, Tao Tang, and Antoni Vaello-Sebastià delves into the intricacies of S&P100 data.

With a unique focus on the significance level of cointegration between constituents, the study unveils the concept of “supercointegrated” pairs. These pairs, marked by a robust level of cointegration, emerge as protagonists in the pairs trading arena, exhibiting unparalleled performance. The research establishes a compelling positive correlation between the degree of cointegration and the profitability of pairs trading portfolios.

Notably, the supercointegrated portfolio transcends conventional benchmarks, showcasing superior out-of-sample performance and a heightened risk-return relationship, particularly accentuated in bear markets. The findings present a paradigm shift in understanding pairs trading, accentuating the pivotal role of cointegration levels in shaping portfolio dynamics amid market fluctuations.

Abstract Of Paper

This paper uses S&P100 data to examine the performance of pairs trading portfolios that are sorted by the significance level of cointegration between their constituents. We find that portfolios that are formed with highly cointegrated pairs, named as “supercointegrated”, yield the best performance reflecting a positive relationship between the level of cointegration and pairs trading profitability. The supercointegrated portfolio also shows superior out-of-sample performance to the simple buy-and-hold investments on the market portfolio in terms of Sharpe ratio. We link the time-varying risk of the pairs trading strategy to aggregated market volatility. Moreover we report a positive risk-return relationship between the strategy and market volatility, which is enhanced during the bear market. Our results remain valid when applying the strategy to European index data.

Original paper – Download PDF

Here you can download the PDF and original paper of Supercointegrated.

(An option to download will come shortly)

Author

Isabel Figuerola-Ferretti
Comillas Pontifical University

Pedro Serrano
University Carlos III of Madrid – Department of Business Administration

Tao Tang
Jinan University

Antoni Vaello-Sebastià
University of the Balearic Islands

Conclusion

In summary, our investigation into S&P100 data unveils a compelling dimension of pairs trading portfolios—those intricately tied to the significance level of cointegration between their constituents, aptly termed “supercointegrated.”

This research establishes a noteworthy correlation, elucidating a positive relationship between the depth of cointegration and the profitability of pairs trading. The supercointegrated portfolio emerges as the epitome of performance, showcasing superior out-of-sample results compared to conventional buy-and-hold strategies on the market portfolio, as evidenced by heightened Sharpe ratios. Our exploration extends to European index data, affirming the robustness of our findings across varied market landscapes.

Moreover, we shed light on the dynamic interplay between the pairs trading strategy’s risk and aggregated market volatility, unraveling a positive risk-return relationship, particularly accentuated during bear markets. This inquiry underscores the nuanced dynamics that underpin successful pairs trading strategies in different market conditions.

Related Reading:

Generalized Statistical Arbitrage Concepts and Related Gain Strategies

Improving Pairs Trading

FAQ

– What is the primary focus of the research paper “Supercointegrated” by Isabel Figuerola-Ferretti, Pedro Serrano, Tao Tang, and Antoni Vaello-Sebastià, and what concept does it introduce in the context of pairs trading?

The primary focus of the research paper is to examine the performance of pairs trading portfolios using S&P100 data, with a unique emphasis on the significance level of cointegration between constituents. The study introduces the concept of “supercointegrated” pairs, which are characterized by a robust level of cointegration. These pairs play a pivotal role in the pairs trading arena, demonstrating unparalleled performance.

– What key correlation does the study establish, and how does the supercointegrated portfolio compare to conventional benchmarks in terms of out-of-sample performance and risk-return relationship?

The study establishes a compelling positive correlation between the significance level of cointegration and the profitability of pairs trading portfolios. The supercointegrated portfolio, formed with highly cointegrated pairs, outperforms conventional benchmarks in terms of out-of-sample performance. It showcases superior results compared to simple buy-and-hold investments on the market portfolio, as evidenced by heightened Sharpe ratios.

– How does the research shed light on the dynamic interplay between risk, aggregated market volatility, and the pairs trading strategy, and what does it reveal about the strategy’s performance during bear markets?

The research illuminates the dynamic interplay between the risk of the pairs trading strategy and aggregated market volatility. It unveils a positive risk-return relationship, particularly accentuated during bear markets. This finding underscores the nuanced dynamics that underpin successful pairs trading strategies in different market conditions, highlighting the strategy’s adaptability and performance during periods of market turmoil.

Get All Stocks And Equities Research Papers Strategies here

Leave a Reply

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}

Monthly Trading Strategy Club

$42 Per Strategy

>

Login to Your Account



Signup Here
Lost Password