Co-Integration period

[Matan Bar-Haim]

Hi guys,

I started trading using pair trading strategy a few months ago and saw some really nice results.

I have selected from the website date base 50 pairs that were cointegrated just two months ago.
My return this month was significantly lower than previous months and when I now started to run the analysis again I found out that many of the pairs that were co-integrated just two months ago are no longer cointegrated.
 
The analysis that I do is for one-year backwords, the same way it is presented in the database.

How do you avoid it? should I change the backtest period? should I change pairs every certain period?

 

[Matan Bar-Haim]

Hello,

Trying to post again- hoping for an answer.

It seems that a lot of the pairs that I have chosen, and were co-integrated ( on a year analysis) are no longer co-integrated. I chose pairs with 95% cointegration both in Eagle Garner and ADF tests with sharpe ratio that is more than one.

is there a way to avoid it?
how often do you need to run a cointegration test for the pairs in your protfolio?
Maybe every three months there is a need to refresh the pairs?

Thanks,
Matan.

[Hung-Wah Cheung]

Hello

Pairs periodically come into and out of cointegration. In my opinion 1 year of data is not enough for back testing. You would need to select a longer period that you are comfortable with. Exactly how long depends upon experience and how frequently you wish to trade.

I know it's not the magic answer you are looking for. Cointegration pairs trading is also an art as well as a science.