Pairs trading is a market-neutral trading strategy that involves buying and selling two stocks simultaneously. The idea behind pairs trading is to find two stocks that are in co-movement and to take advantage of the differential in their price movement.
In order for pairs trading to be successful, you need to find two stocks that are:
– Highly correlated with each other
– Have a strong historical relationship
– Are in the same industry or sector
Once you have found two stocks that meet the above criteria, you can begin to monitor their price movement. When one stock outperforms the other, you can take a long position in the stock that is outperforming and a short position in the stock that is underperforming.
Most published papers generally conclude that pairs trading can be a profitable strategy that delivers alpha if done correctly. Reference [1] presented, however, opposite results,
Overall, the result shows that the Hurst method cannot generate a strategy that can outperform the market and its performance is superior as compared to the cointegration method but it is not as compared to the correlation method. This result does not correspond with the result of some other papers in the past, which states that the cointegration method is superior compared to other methods. On the other hand, the result implies that the market is efficient, so we cannot build a trading strategy and earn an excess return on the market, which corresponds with the efficient market hypothesis, though the question of whether the market is efficient or not still remains debated in the literature. Moreover, pair trading strategy in case of all methods can sometimes outperform the market in recession stage but cannot in the expansion stage, which confirms the market neutrality of pair trading strategy.
In short, using the Hurst exponent method for selecting pairs, the authors concluded that pairs trading does not outperform Buy and Hold. This is contrary to the majority of publications.
Let us know what you think in the comments below.
References
[1] Quynh Bui, Robert Ślepaczuk, Applying Hurst Exponent in pair trading strategies on Nasdaq 100 index, Physica A 592 (2022) 126784
Further questions
What's your question? Ask it in the discussion forum
Have an answer to the questions below? Post it here or in the forum

CALGARY, Alberta, May 20, 2025 (GLOBE NEWSWIRE) — Inventronics Limited (“Inventronics” or the “Corporation”) (IVX:TSX Venture) announces the grant of options to purchase common shares of the Corporation to members of the management team and Board of Directors of the Corporation. Each of the four…

Thrive Enables Organizations to Protect Data, Enhance Security, and Meet Regulatory Standards BOSTON, May 20, 2025 (GLOBE NEWSWIRE) — Thrive, a global technology outsourcing provider for cybersecurity, Cloud, and IT managed services, today announced its new Compliance Center. The Compliance Center provides mid-market businesses and…

Key nCino Platform enhancements released to help banks, credit unions, and IMBs gain a competitive advantage through intelligence-driven automation Company launches nCino Research Institute to deliver economic insights and actionable strategies for banking growth WILMINGTON, N.C., May 20, 2025 (GLOBE NEWSWIRE) — nCino, Inc. (NASDAQ:…

Company to Showcase Novel Water Treatment Solutions for Potable Water CORSICANA, Texas, May 20, 2025 (GLOBE NEWSWIRE) — Birchtech Corp. (TSX: BCHT) (OTCQB: BCHT) (“Birchtech” or the “Company”), a leader in specialty activated carbon technologies for sustainable air and water treatment, today announced management will…

Your vote is important no matter how many shares you own. Vote today. Shareholders who have questions or need assistance with voting should contact KP Tissue’s proxy solicitation agent and shareholder communications advisor, Laurel Hill Advisory Group, by telephone at 1-877-452-7184 or by email at…