Grade: 7.5 / 10
Abstract: The purpose of this paper is to determine if pairs trading is still a profitable trading strategy, in line with current literature, it still is. How it answers the question is multifaceted, we do so by investigating different models under various parameters and implementing different strategies under a cointegrated framework. The data used in this study are all tradable securities on the NYSE, NASDAQ, ARCA and AMEX. The results in the study show that using moving windows to regularly update trading signals and using a GARCH(1,1) model to adjust trading bands with a conditional volatility produces the highest winning ratio of winning pairs and best overall performance. The study is limited as trading costs are not accounted for and also more investigative studies could have been carried out on other estimated parameters and particular trading strategies could have been extended.