Performance of pairs trading on the S&P 500 index

Until now, nearly all papers focused on pairs trading have just implemented the strategy given by Gatev et al. (2006). However, due to many parameters that are a given in that paper, it may be better to perform pairs trading with different parameters. These parameters are:  the length of the formation period  the length of the trading period  the standard deviation on which you open a trade  working with a stop loss Adjusting parameters in this thesis has showed that opening a pair when it is 1.5 standard deviation from its mean is better than the standard 2 standard deviations which has been used in many papers. The formation and trading period of respectively 250 and 125 days are still good periods to use. Implementing a tight stop-loss however, decreases results. In addition, no pairs trading research has been performed yet on the S&P 500 index, and since there are many combinations possible, this could have produced interesting results. However, when including commissions, pairs trading does not turn out to be a good strategy on the S&P 500 index. In addition, performance of pairs trading has significantly declined in the last 10 years compared to the 10 years before.