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];

Cited References (12)

  1. Pairs Trading: Performance of a Relative-Value Arbitrage Rule (2006)
  2. Pairs trading : quantitative methods and analysis. (2004)
  3. Pairs trading (2005) — link
  4. Does simple pairs trading still work? (2010) — link
  5. Bayesian factorized cointegration analysis (2012) — link
  6. Pairs trading with nonlinear and non-gaussian state space models (2020) — link
  7. Distribution of the estimators for autoregressive time series with a unit root (1979) — link
  8. Co-integration and error correction: representation, estimation, and testing (1987)
and 4 more
  1. The relative merits of alternative investments in passive portfolios (2008)
  2. The Deflated Sharpe Ratio: correcting for selection bias, backtest overfitting and non-normality (2014)
  3. A new approach to linear filtering and prediction problems (1960) — link
  4. From cointegration to out-of-sample failure: a pairs-trading case study on PEP/KO (2026) — link

0 of 12 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.