Pairs Trading in the Brazilian Stock Market: The Impact of the Frequency of the Data
Keywords:
Pairs trading. Market efficiency. High frequency data. Quantitative strategy. Statistical arbitrage.Abstract
The pairs trading strategy is a popular method for trading financial assets. One of the reasons for such popularity is that the result of this type of operation depends solely on the relationship between the price of two assets, and not on the overall market condition. The possibility of capturing pricing inefficiencies is what allows the investor to realize consistent profits using a systematic method for trading financial contracts. Based on the opening of a long and short position, this strategy of statistical arbitrage seeks to profit when the prices of both assets converge to their historical behavior. The objective of this paper is to analyze the performance of the pairs trading strategy for different frequencies of data in the Brazilian stock Market. The study based itself on the results of Perlin (2007), which found that market inefficiencies are higher for stock data sampled in lower frequency, in this case daily. The present research extends the range of frequencies to the intraday universe with stock prices sampled at 1, 5, 15, 30 and 60 minutes. The period of the database starts from 2008 until the end of 2011. The selection of stocks comprises of the twenty assets with highest number of contracts negotiated in the period. In the training period, the selection of pairs for each stock is based on the lowest quadratic variation of their normalized prices. In the trading period, the strategy checks the performance of the previously defined trades. The results of the research, which compared the Sharpe ratios of the pairs trading strategy for the different frequency of the data, confirm the primary hypothesis that the higher sampling frequency, the higher evidence of market inefficiency.
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