High-frequency Pairs Trading on a Small Stock Exchange

Abstract

We study the performance of a high-frequency pairs trading (PT) strategy on the 100 most liquid stocks, in 15-min intervals, on a small commodity dominated stock exchange (Oslo Stock Exchange) using a comprehensive dataset from January 2012 to March 2016. We use both the distance and cointegration approach. Moreover, we let the formation (trading) period vary between 2 (1), 4 (2), and 6 (3) weeks, in order to test the impact on the PT profit. We find that the distance and cointegration approaches both have their strengths and weaknesses. In addition, we find that a shorter formation (and trading) period yields better results. As a further contribution to the literature, our findings imply that a simple static PT strategy, still is profitable using high-frequency data. Further, our results show better performance in a bull market than in a sideways-moving, volatile market.