Comparison of Trading Strategies: Dual Momentum vs Pairs Trading

• Published in: 2023 IEEE 47th Annual Computers, Software, and Applications Conference (COMPSAC) pp. 1363 - 1369
• Main Authors: Singh, Japjeet, Thulasiram, Ruppa K., Thavaneswaran, Aerambamoorthy, Paseka, Alex
• Format: Conference Proceeding
• Language: English
• Published: IEEE 01-06-2023
• Subjects: Absolute momentum; Bitcoin; cointegration; Cryptocurrency; Dual-momentum; information filtering; Momentum investing; Pairs trading; Profitability; Relative momentum; Security; Software
• DOI: 10.1109/COMPSAC57700.2023.00207

There have been several studies in the literature discussing the profitability with various trading strategies. Two common strategies are pairs trading and momentum strategies. The momentum strategy aims to exploit the phenomenon of momentum, where securities that have performed well in the past are likely to continue performing well in the future. The concept behind a pairs trading of stocks is similar to the statistical idea of cointegration. The goal of pairs trading is to profit from the relative price movements of the two assets, rather than from the absolute price movements of either asset. This strategy is generally implemented using algorithmic trading techniques, and it is often used by traders and investors to take advantage of mispricing in the market. In this study we first compare these two strategies and implement them to study for their profitability. We considered two major cryptocurrencies (Bitcoin and Ethereum) for these two trading strategies and show that with daily price data, dual momentum strategy generates significantly better results than the pairs trading strategy.