Authors: Isabel Figuerola-Ferretti - Universidad Pontificia Comillas (Spain)
Pedro Serrano - University Carlos III of Madrid (Spain)
Antoni Vaello Sebastia - University of Balearic Islands (Spain) [presenting]
Tao Tang - Jinan University (China)
Abstract: The performance of pair-trading portfolios is examined when sorted by the level of cointegration of their constituents. The supercointegrated portfolio, that formed by pairs at 1\% confidence level of cointegration tests, exhibits a superior out-of-sample performance than simple buy-and-hold and passive investments. The time-varying risk of the pairs strategy is linked to aggregate market volatility. A positive risk-return relationship of the strategy is also found.