Welcome An Anatomy of Pairs Trading : the role of idiosyncratic news , common information and liquidity

@inproceedings{Engelberg2008WelcomeAA,
  title={Welcome An Anatomy of Pairs Trading : the role of idiosyncratic news , common information and liquidity},
  author={Joseph Engelberg and Pengjie Gao and Ravi Jagannathan},
  year={2008}
}
In this paper, we examine the pro…tability from a convergence trading strategy called pairs trading which bets that a pair of stocks with price paths that have historically moved together will eventually converge if they ever diverge. We …nd that the pro…tability from pairs trading is greatest soon after the pairs diverge and that the pro…tability is strongly related to events around the date of divergence. Pro…tability is low when there is idiosyncratic news about a stock in the pair and high… CONTINUE READING

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