Correspondence: Marcelo Scherer Perlin, ICMA/Reading University, Reading, UK

¹is a PhD student at ICMA/Reading University. His research interests are mainly related to practical applications of computational statistics and econometrics in finance. This includes duration models (point processes), regime-switching models, mixture models, non-parametric formulations, quantitative trading strategies and performance assessment.

Received 9 December 2008; Revised 9 December 2008.

Abstract

Pairs-trading is a popular trading strategy that tries to take advantage of market inefficiencies in order to obtain profit. The idea is simple: find two stocks that move together and take long/short positions when they diverge abnormally, hoping that the prices will converge in the future. From the academic point of view of weak market efficiency theory, pairs-trading strategy should not present positive performance, as, according to it, the actual price of a stock reflects its past trading data, including historical prices. This leaves us with a question: does pairs-trading strategy present positive performance for the Brazilian market? The main objective of this research is to verify the performance and risk of pairs-trading in the Brazilian financial market for different frequencies of the database: daily, weekly and monthly prices for the same time period. The main conclusion of this simulation is that pairs-trading strategy was a profitable and market-neutral strategy at the Brazilian market. Such profitability was consistent over a region of the strategy's parameters. The best results were found for the highest frequency (daily), which is an intuitive result.