Pairs Trading and Accounting Information
نویسندگان
چکیده
This paper examines the impact of accounting information events (i.e., earnings announcements and analysts’ earnings forecasts) on the profitability of a pairs trading strategy proposed by Gatev et al. (2006). Using a portfolio of U.S. stock pairs between 1981 and 2006, we find that pairs trades are frequently triggered around accounting information events. More importantly, we find that pairs positions opened after accounting events are significantly less profitable than pairs positions opened in non-event periods. Furthermore, we find that incremental excess returns can be achieved by delaying the closing of a pairs position until after accounting information events. Overall, our results suggest that drift in stock prices following earnings announcements and analysts’ earnings forecasts is a significant factor affecting the profitability of pairs trades. JEL Classification: G12; G14; M41
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