Pairs-trading strategy: Empirical analysis in Japanese stock market

Pairs-trading strategy is one of the market neutral investment strategies in the stock market. We consider a couple of stocks with common trends, and when a spread between these stock prices widens temporally, we take an investment position with one stock long and the other short. Then, we can make a profit on its position if the spread narrows again. In this paper, we propose the pairs-trading strategy by using regression analysis and experimental design. In our empirical analysis in the Japanese stock market, we can succeed in obtaining stable positive returns.