This paper examines the performance of pairs trading, a Wall Street investment strategy, using daily data from 1962 to 1997. The authors form pairs of stocks based on historical price movements and test the profitability of trading these pairs over six-month periods. They find that self-financing portfolios of top pairs can generate average annualized excess returns of up to 12 percent. The profits may be partly due to market microstructure effects, but they exceed conservative estimates of transaction costs for most of the period. The authors also use bootstrapping to distinguish pairs trading from pure mean-reversion strategies, suggesting that the 'pairs' effect differs from previously documented mean reversion profits. The study reveals that pairs trading is a profitable strategy, but not one that can support large amounts of investor capital. The results provide insights into the mechanisms and performance of relative-price arbitrage activities, contributing to our understanding of market efficiency.This paper examines the performance of pairs trading, a Wall Street investment strategy, using daily data from 1962 to 1997. The authors form pairs of stocks based on historical price movements and test the profitability of trading these pairs over six-month periods. They find that self-financing portfolios of top pairs can generate average annualized excess returns of up to 12 percent. The profits may be partly due to market microstructure effects, but they exceed conservative estimates of transaction costs for most of the period. The authors also use bootstrapping to distinguish pairs trading from pure mean-reversion strategies, suggesting that the 'pairs' effect differs from previously documented mean reversion profits. The study reveals that pairs trading is a profitable strategy, but not one that can support large amounts of investor capital. The results provide insights into the mechanisms and performance of relative-price arbitrage activities, contributing to our understanding of market efficiency.