Volume is an important factor that has not been sufficiently studied in the literature, although increasing attention is now being devoted to its role. For example, we recently discussed the link between intraday volume and volatility.
Continuing this line of inquiry, Reference [1] revisits the age-old quantitative strategy of pairs trading and incorporates volume analysis into the framework. The author studied pairs formed from the S&P500 constituent stocks using the conitegration method. The data spans from 2005 to 2024. They pointed out,
This study investigated pairs trading strategies across market segments, parameters, weighting methods, and cost structures using U.S. equity data (2005-2024). Volume emerged as the dominant performance factor, with high-volume pairs consistently outperforming low-volume counterparts across multiple metrics, including superior returns when converging towards the historical relationship. The success of volume-based segmentation may stem partly from grouping stocks with similar trading characteristics, creating more stable price relationships. Notably, optimal parameter configurations were remarkably similar between volume deciles, demonstrating consistent underlying market dynamics across liquidity environments.
Contrary to efficient market predictions, performance improved in the testing period (2015-2024), suggesting structural market changes or institutional constraints have preserved the strategy’s effectiveness despite widespread documentation. Different weighting methodologies produced similar results, with equal weighting combining simplicity and strong performance.
In short, the paper finds that trading volume is a dominant performance driver, with high-volume pairs consistently outperforming low-volume counterparts. Contrary to efficient market predictions, strategy performance improved in the later sample period, while results remained robust across parameter choices and weighting schemes. Overall, pairs trading still remains profitable.
This represents an important contribution that may reinvigorate research on pairs trading and trading volume.
Let us know what you think in the comments below or in the discussion forum.
References
[1] Mustafa Hussein, Can Safety and Profitability Coexist? Performance Analysis of Pairs Trading among S&P 500 Stocks, 2025, University of Gothenburg
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