A Note on the Effectiveness of Pairs Trading for Individual Investors

International Journal of Economics and Financial Issues Vol. 3, No. 3, 2013, pp.763-771

9 Pages Posted: 6 Jul 2013

See all articles by Fabio Pizzutilo

Fabio Pizzutilo

Università degli Studi di Bari “Aldo Moro”

Date Written: July 5, 2013

Abstract

We investigated the profitability of a simple and easily implementable pairs trading strategy that included trading costs and restrictions to short selling so as to replicate an effective strategy exploitable by an individual investor. Notwithstanding the limitations embodied in our model, pairs trading still works. However, the constraints significantly affect the profitability of the strategy. We found evidence that restrictions to the number of shares that are allowed to be shorted have a relevant impact on the risk profile of the pairs portfolios. Our results support the hypothesis that pairs trading is an equity market neutral investment strategy.

Keywords: pairs trading, market neutral, Italian stock market, trading strategy, statistical arbitrage, short selling, personal finance

JEL Classification: G11

Suggested Citation

Pizzutilo, Fabio, A Note on the Effectiveness of Pairs Trading for Individual Investors (July 5, 2013). International Journal of Economics and Financial Issues Vol. 3, No. 3, 2013, pp.763-771, Available at SSRN: https://ssrn.com/abstract=2290097

Fabio Pizzutilo (Contact Author)

Università degli Studi di Bari “Aldo Moro” ( email )

largo Abbazia S. Scolastica, 53
Bari, 70124
Italy

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