Abstract
Paired-switching refers to investing in one of a pair of negatively correlated equities/ETFs/Funds and periodic switching of the position on the basis of either the relative performance of the two equities/ETFs/Funds over a period immediately prior to the switching or some other criterion. It is based upon the idea that if the returns of two equities are negatively correlated, the overlapping of the periods during which the equities individually yield returns greater than their mean values will be infrequent. Consequently, if the criterion for switching is even minimally accurate in its ability to identify the boundaries of such periods, there is a possibility of improving the performance of the portfolio consisting of the two equities over the portfolio wherein the two equities are statically weighted on the basis of traditional methods such as, for example, variance minimization. In this paper we present some results that indicate that some very simple criteria for paired-switching can lead to lower volatility without any significant penalty in terms of lower returns.
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