Quant · Dec 2025
Statistical Pairs Trading Backtest
An Engle-Granger market-neutral strategy applied to AAPL/MSFT, KO/PEP, and XOM/CVX over daily data from 2015 to 2023. The backtest incorporates walk-forward cointegration screening, out-of-sample hedge ratios, and a 1 bp transaction cost assumption. Sharpe ratio, maximum drawdown, turnover, and signal decay are reported.
AAPL/MSFT, KO/PEP, XOM/CVX
Pairs
2015 to 2023 daily
Window
1 bp
Costs
Walk-forward
Method
Problem
Many publicly available pairs trading studies introduce look-ahead bias through full-sample hedge ratios. I aimed to produce an honest evaluation that accounts for realistic transaction costs.
Approach
I applied Engle-Granger cointegration screening using rolling training and testing windows, computed out-of-sample hedge ratios at each refit, and assumed a 1 bp transaction cost on every fill. I tracked Sharpe ratio, maximum drawdown, cumulative return, turnover, and signal decay throughout.
Results
The analysis produced a clear out-of-sample picture of which pair relationships persist, where transaction costs erode the edge, and how quickly signals decay. Results are reported transparently, including cases in which the strategy underperforms.
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