Sample strategy #6 – Pairs Trading with Country ETFs
An academic paper from Thomakos, Wang and Schizas offers one such option. They use ETFs, which provide a much smaller universe and have one great advantage compared to stocks – the ETF is a portfolio of stocks and is therefore more resilient to unexpected news related to single stock (which often breaks a promising convergence in stock's pairs). Pairs Trading with Country ETFs is therefore an easy and promising version of a pairs trading strategy.
Performance and risk characteristics of this strategy also look very promising – the backtest indicates more then 20% p.a. performance with 10% volatility which means an attractive Sharpe ratio of 1.66.
The source paper can be found on the following web page: http://www.fma.org/Denver/Papers/pairetf.pdf
Our strategy overview with extracted trading rules and hypothetical performance chart with probability bands can be accessed here: http://quantpedia.com/Screener/Details/55
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