Pairs Trading: Performance of a Relative-Value Arbitrage Rule (Evan Gatev, William N. Goetzmann, K. Geert Rouwenhorst), Review of Financial Studies, 2006.
This is a useful paper that can be warmly recommended to anyone who is interested in the idea of pairs trading. It has a nice historical discussion of the method, and it gives a clear statitical basis for studying pairs trading. Most pleasing of all, it offers the prospect of some genuine cheese.
Pairs trading (Elliott, van der Hoek, and Malcolm) Quantitative Finance, 2005.
This is a theoretical paper that simply posits a class of models for which mean reversion is "baked into the cake." Everyone in our class would see in a moment that the proposed models do not confirm to the stylized facts of any asset class that we have considered. Thus, the paper seems a priori naive. It does provide a discussion of some Kalman filtering ideas that may be instructive, even if the exposition mainly repeats what can be found in many sources.