Paper: arXiv 2609.35359

Authors: Davide Graziano

Abstract

This paper examines whether a cointegration-based pairs trading strategy between PepsiCo and The Coca-Cola Company is statistically robust and economically exploitable. We first test for cointegration and estimate the spread’s mean-reversion dynamics over 2013-2018, then hold these statistical parameters fixed and optimise a threshold-based trading strategy in-sample over 2018-2023. Robustness is assessed through transaction-cost and parameter sensitivity tests, walk-forward validation, and Adjusted and Deflated Sharpe Ratios. The strategy is then evaluated out-of-sample from 2023 to the present, including an analysis of time-varying hedge ratios using rolling OLS and a Kalman filter. The results show that weakening mean-reversion dynamics in the spread undermine the effectiveness of the strategy out-of-sample.

Complexity vs Empirical Score

  • Math Complexity: 6.5/10
  • Empirical Rigor: 8.0/10
  • Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper demonstrates a solid application of quantitative methods to a well-known problem, with a strong emphasis on empirical validation and robustness. While the core methodology isn’t entirely novel, the detailed case study and rigorous out-of-sample testing provide valuable insights into the practical challenges of pairs trading.

Research Flowchart

  flowchart TD
    A[Research Goal: Assess PEP-KO Pairs Trading Strategy] --> B{Methodology: Cointegration & Threshold Trading};
    B --> C{Data: PEP-KO Prices (2013-Present)};
    C --> D[Computational Processes: In-Sample Optimization & OOS Evaluation];
    D --> E[Outcomes: Weakening Mean-Reversion, OOS Failure];