Researcher ORCID Identifier

https://orcid.org/0000-0002-2089-2240

Graduation Year

2021

Date of Submission

5-2021

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Mathematics

Second Department

Economics

Reader 1

Mark Huber

Reader 2

Eric Hughson

Rights Information

© 2021 Benjamin J Figueroa

Abstract

We propose a new performance metric for describing the profitability of pairs trading and perform a sensitivity analysis of varying levels of trading thresholds on the entire US equity market from January 2000 to December 2020. Our new performance metric, Positive State-Based Profits and Negative State-Based Profits more accurately describe the complexity of cointegrated pairs trading compared to previously used metrics. With Positive State-Based Profits and Negative State-Based Profits, we find that cointegrated pairs trading was very profitable over the past 20 years, but also experiences significant variance in results. Furthermore, we find that trading thresholds of either 1.0, 1.5, or 2.0 result in more stable results when compared to thresholds of 2.5 and 3.0. However, thresholds of 1.0, 1.5, or 2.0 dilute the returns generated from edge case mean deviations, where the strategy is often most profitable. In addition, the thresholds of either 1.0, 1.5, or 2.0 all show similar performance when compared to each other. Finally, we find that cointegrated pairs trading performs better during periods of significant market instability, e.g. 2007 to 2011.

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This thesis is restricted to the Claremont Colleges current faculty, students, and staff.

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