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Recently I played with different pair trading algorithms. I tried Kendall's tau value and cointegration pvalue to find cointegrated pairs. I tried copula based misprice index and cointegration based zscore to find trading signals on the cointegrated pairs. I tried different stock pairs in the same sector and different ETF pairs. So far my backtesting results are not promising at all. There are quite a few papers talking about pair trading with reasonable returns. Appearently I don't see those in my experiments. I am wondering what I am missing here. Kendall's tau value and cointegration pvalue is not good enough to find good cointegrated pairs? Or there are more tricks on how to trade cointegrated pairs than misprice cap and floor and zscore 1.0 and -1.0? Anyone sucessfully implemented pair trading algorithm here? Any suggestions?
Sorry for very basic questions. I am new to trading algorithms in general.
Petter Hansson
I don't know about pairs trading in particular, but in general it's the case that whatever was working a few years back isn't necessarily working today. The more well known a strategy is the more crowded it will be and there's a finite amount of dollar volume in mispricing to be extracted.
Jessica Gu
Thanks Petter for the response!
Jessica Gu
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