Empirical Investigation of an Equity Pairs Trading Strategy
Huafeng (Jason) Chen et al. (4 authors), 2019 · Management Science
What the paper asks for.
Each trade year y, for every CRSP stock i, take the 50 most-correlated stocks (Pearson correlation of monthly returns over [Jan(y-5), Dec(y-1)], 60 months) as i's pair set P_i; fit OLS slope beta_C of R_i on Cret_i over the same window. Each month m of year y, form the signal RetDiff = beta_C * (Cret - Rf) - (Lret - Rf), sort the cross section into deciles, value-weight LONG D10 / SHORT D1 (zero cost), one-month holding, monthly rebalance.
- Type
- technical
- Implementation
- pandas
- Rebalance
- monthly
- Long-short
- yes
- Data
- One-command fetcher for WRDS-sourced task data
- Operational scope
- The paper-defined methodological core is retained; the fixed instruction instantiates only the data mappings, interfaces, and evaluation conventions needed for execution.
- 01 Data loading
- 02 Feature engineering
- 03 Model fitting
- 04 Signal generation
- 05 Portfolio construction
- 06 Execution
18 properties · 80 attempts.
Each row is one requirement the strategy must satisfy. The bar reports the share of observed checker verdicts that pass; missing checker output is not converted into a property verdict.
- A2no global normalizestage · feature eng71/72
- A3no future data accessstage · feature eng64/72
- A4causal consistencystage · signal gen69/72
- A5no survivorship biasstage · portfolio65/72
- A7data frequency alignmentstage · data loading67/72
- A8transaction timingstage · execution67/72
- A9signal delay teststage · signal gen60/72
- A10e2e metric consistency26/72
- B1pairs count top 50§Section 2.1 “We then find 50 stocks with the highest correlations to stock i as its pairs”provenance · paper-explicitstage · signal gen68/72
- B2pairs set excludes self§Section 2.1 “We then find 50 stocks with the highest correlations to stock i as its pairs”provenance · paper-explicitstage · signal gen69/72
- B3beta c ols slope 60 months§Section 2.1 “beta^C is the regression coefficient of firm i's monthly return on its pairs-portfolio return using monthly data between year t-4 and t”provenance · paper-explicitstage · feature eng59/72
- B4retdiff formula exact§Section 2.1 “RetDiff = beta^C * (Cret - Rf) - (Lret - Rf)”provenance · paper-explicitstage · feature eng67/72
- B5long d10 short d1§Section 2.1 “the zero-cost portfolio Decile 10 - Decile 1 (i.e., longing Decile 10 and shorting Decile 1) generates a return of 1.40% per month”provenance · paper-explicitstage · signal gen72/72
- B6value weighted within leg primary§Section 2.1, Table 1 Panel A “Panel A reports value-weighted portfolios formed using all stocks with 60 monthly returns in the last five years.”provenance · paper-explicitstage · portfolio66/72
- B7annual pair set reformation§Section 2.1 “For each stock i in year t+1, we compute the Pearson correlation coefficients between the returns of stock i and all other stocks in the CRSP using monthly data from January of year t-4 to December of year t”provenance · paper-explicitstage · feature eng68/72
- B8lret is previous month stock return§Section 2.1 “Lret is the previous month's stock return”provenance · paper-explicitstage · feature eng68/72
- B9zero cost long short dollar neutral§Section 2.1 “the zero-cost portfolio Decile 10 - Decile 1”provenance · paper-explicitstage · portfolio70/72
- B10ret diff sort uses previous month§Section 2.1 “we form 10 portfolios, Decile 1 through Decile 10, based on the previous month's RetDiff; the holding period is one month”provenance · paper-explicitstage · signal gen71/72
The lowest-passing observed requirement is e2e metric consistency: 26 of 72 observed checker verdicts pass. The full property list above shows whether errors concentrate in domain-level validity or the paper-specific strategy logic.