Abstract
The following research presents new properties of cointegrated time series that serve as a basis for a novel high frequency trading strategy. The expected profit of this strategy is always positive. Its practical implementation is illustrated using the daily closing prices of four world stock market indexes. In-sample (as well as out-of-sample) results show that the long-term dependencies of financial time series can be profitably exploited in a variant of pairs trading'' strategy. This paper includes an extended empirical study that shows the strategy's performance as a function of its parameters. The backtests presented show the daily profit and loss results for the period between 2001 to 2006. During that time the strategy significantly outperformed a simple buy-and-hold of the individual indexes.
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