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Index Pairs Trading: Waiting for Divergence

Market Measures

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A recent study looked at pairs trading the index ETFs (DIA, IWM, QQQ, SPY). Tom and Tony look at new research that takes this concept a step further.

The team decided to isolate trade occurrences, looking for larger divergence in the index products.

Study:

  • 2004 - 2017
  • DIA, IWM, QQQ, SPY
  • Observed 1 Month of Movement in each ETF (Daily)
  • Simulated buying the weakest, selling the strongest
  • Compared Managing the position for:
  • 1% Return on Capital
  • 2% Return on Capital
  • If the ROC target was not met, the trade was held for 3 months.
  • Compared:
  • All Occurrences
  • Occurrences where the divergence was over 5%

The results are extremely compelling and historically, it appears that waiting for wider divergence enhanced pairs trades.

Tune in for all the metrics and the full discussion!

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