Pairs Trading: Performance of a Relative-Value Arbitrage Rule

Evan Gatev, William N. Goetzmann, K. Geert Rouwenhorst · 2006 · Review of Financial Studies

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The distance method: match stocks by normalised price paths, trade two-sigma divergences. The baseline every pairs paper compares against.

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At a glance

Level: Beginner: No prior microstructure or stochastic calculus needed
Horizon: LFT
Data needed: Daily bars Set what data you have
Themes: Stat arb
Assets: Equities
Market: US

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Statistical arbitrage

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Cite

@article{gatev2006pairs,
  author = {Gatev, Evan and Goetzmann, William N. and Rouwenhorst, K. Geert},
  title = {{Pairs Trading: Performance of a Relative-Value Arbitrage Rule}},
  journal = {Review of Financial Studies},
  year = {2006},
  doi = {10.1093/rfs/hhj020}
}

Gatev, E., Goetzmann, W. N., & Rouwenhorst, K. G. (2006). Pairs Trading: Performance of a Relative-Value Arbitrage Rule. Review of Financial Studies. https://doi.org/10.1093/rfs/hhj020