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Picking up the pennies in front of the bulldozer: The profitability of gilt based trading strategies

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  • Quinn, Barry
  • Hanna, Alan
  • MacDonald, Fred

Abstract

We develop a simple cointegrated pairs trading strategy, including automatic risk control and adjustment for short-selling costs. We applied the strategy to the previously untested and highly liquid market for gilt futures. Profitability is exploited through the mean reversion in the relationship between long and medium gilt futures, and between medium and short gilt futures. Results show the potential for arbitrage profits exists, even using a relatively unsophisticated model, particularly between long and medium gilt futures.

Suggested Citation

  • Quinn, Barry & Hanna, Alan & MacDonald, Fred, 2018. "Picking up the pennies in front of the bulldozer: The profitability of gilt based trading strategies," Finance Research Letters, Elsevier, vol. 27(C), pages 214-222.
    • Handle: RePEc:eee:finlet:v:27:y:2018:i:c:p:214-222
    DOI: 10.1016/j.frl.2018.03.019
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    References listed on IDEAS

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    4. Evan Gatev & William N. Goetzmann & K. Geert Rouwenhorst, 2006. "Pairs Trading: Performance of a Relative-Value Arbitrage Rule," The Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 797-827.
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    Cited by:

    1. Gupta, Kartikay & Chatterjee, Niladri, 2020. "Selecting stock pairs for pairs trading while incorporating lead–lag relationship," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 551(C).

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