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I am writing paper on the profitability of the pairs trading strategy using US equities. I have done a pre-check to see which business sectors have stocks that are cointegrated. The utilities sector is showing the highest number of cointegrations among them. I could not find an academic paper that used this sector. Hence, I wanted to know if there is any economic or financial reasoning I can present, for me to use utilities to test for pairs for the trading strategy?

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  • $\begingroup$ With the statement - "The utilities sector is showing the highest number of cointegrations among them.", do you mean you have checked for cointegration among the companies in the utility sector? Do you want to test utilities sector for pairs trading with other sectors, or paris trading within the utiities sector? $\endgroup$
    – Saurabh
    Commented Feb 17, 2021 at 8:13
  • $\begingroup$ I checked the cointegration among companies within the utilities sector and I saw highest cointegration among the stocks within that sector compared to stocks in the other sector. Therefore, I want to test pairs trading within the stocks in the utlities sector. $\endgroup$ Commented Feb 20, 2021 at 15:47
  • $\begingroup$ They have regulated business models and returns, based on only three underlying commodity prices = gas, water, and electricity. As such, higher cointegration because they "lookalike" comes as no surprise. But this could actually undermine your analysis! The reasons why they cointegrate might distort our pairs strategy... suggesting conclusions that do not hold in freer, less cointegrated sectors. $\endgroup$
    – demully
    Commented Feb 22, 2021 at 9:10

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