Harbourfront Quantitative

Integrating Fundamental Metrics Into Pairs Trading

The paper proposes a novel pairs‑trading framework that blends fundamental metrics—such as ROE, sales growth, leverage, geographic proximity, and industry alignment—with traditional statistical measures. Each factor receives a regression‑derived weight, forming a composite score for pair selection. Back‑testing shows the multi‑factor model delivers higher risk‑adjusted returns than the classic Gatev et al. (2006) approach, especially during volatile periods, though it still lags passive index performance and faces out‑of‑sample challenges. The study highlights the potential of fundamental integration in statistical arbitrage.