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Pairs trading is a quantitative trading approach that exploits instances of financial markets exhibiting disequilibrium. Through the identification of a pair of stocks with a his-torical pattern of correlated movement, and under the assumption that their price differentials will return to a central tendency, an investor can seek to gain from this mean-reversion by establishing a long position in the designated pair. Throughout the years, numerous trading frameworks and methodologies have been devised to enhance the efficacy of this strategy. This paper proposes an approach based on cointegration and correlation, but ultimately utilizes cointegration to identify the pair trading investment strategy that can be applied to technology sector stocks and metal futures in China over the last five years. The top five ranked portfo-lios are then evaluated. The results indicate that the pairs with Silver and Copper exhibited positive returns, while the pair with Palladium yielded negative returns.
Liu et al. (Wed,) studied this question.