Statistical Arbitrage Strategies under Different Market Conditions: The Case of the Greek Banking Sector

Abstract

In this article, we examine the behaviour of cointegration-based pairs trading (PT) strategies, under different market conditions. Reported results indicate that changes in market conditions affect the stability of long-run relations between pairs of stocks, therefore suggesting that arbitrageurs should perform rebalancing between the examined stocks when a change in market trend is evident. The applicability of our results may be of importance to market participants; although cointegration applications have received considerable attention from hedge funds adopting statistical arbitrage (SA) strategies, little evidence has been reported for the validity of these trading strategies under changing market conditions. JEL Classification: C32, G11