Pairs Trading: Testing the Consistency of a Statistical Arbitrage Investment Strategy Across US Economic Sectors

Student: Majidov Mikayil

Educational Programme: Financial Markets and Financial Institutions (Master)

Year of Graduation: 2021

This Master thesis revises theories of statistical arbitrage and uses one of the main methodologies to test the performance of a strategy in the US market with the use of daily data since the beginning of 2010. The returns on the strategy are compared between 9 key economic sectors: Consumer Discretionary, Consumer Staples, Energy, Financials, Healthcare, Industrials, Materials, Real Estate, Telecom, and Utilities. The model provided by the author represents a classic approach with discovering mean reversion in spread between asset prices and is augmented with Kalman filtering and exposure time limiting. The thesis will assess how the performance of the same statistical arbitrage strategy varies among key economic sectors. To evaluate the performance of the sectors, the Fama-French five-factor portfolio is utilized. A group of thematic asset returns is also taken as input and an average/median of market factor exposures is calculated to encapsulate industry specifics.

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