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Hello everyone,
I am new here. Here is a simple pairs trading formula for calculating the spread between two assets
(equation 1).
So, I have backtested a simple pairs trading strategy on the german bond market, especially on the
pair Euro-bund/Bobl (Euro-bund = 10 year treasury note futures and Bobl = 5 year treasury note
futures for the german bonds). I don't test the correlation between the two assets, but in general it is
pretty high (over .90 or 90%).
So, here is the backtest I have done on the past five years (1/12/2009 17/10/2014). In the datas
that I used, some gaps are there (no data between 28/2/2013 and 29/4/2013 excluded and between
30/8/2013 and 2/10/2013 excluded). The prices used are the close prise on the Euro-Bund and
BOBL futures (EUREX) from 1 december 2009 to 17 october 2014.
Here is the formula to measure the discrepancies between the two assets:
R R
Signal (t) = A , i B ,i (1)
A ,20 B ,20
Where:
Signal (t) is the trading signal,
R A , i is the return of the asset A for i period,
R B , i is the return of the asset B for i period
A ,20 is the standard deviation of the returns from the asset A for 20 periods,
B ,20 is the standard deviation of the returns from the asset B for 20 periods.
It is possible to backtest more periods from the equation 1, but if I chose the return of 1 period and
the standard deviation from the last 20 periods the reason is 1 for the mispricing on a daily basis
and the 20 for a averaged volatility of the return on the last trading month numbered in days.
Descriptive statistics
Mean 267,59
Error-type 71,4
Median 270
Mode 280
Standard deviation 371,02
Variance of the sample 137660,32
Kurtosis 4,51
Skewness 1,56
Range 1910
Minimum -410
Maximum 1500
Sum 7225
Number of samples 27
level of confidance (95,0%) 146,77
1,4
1,2
0,8
0,6
0,4
0,2
0
2
5
6
7
-0
-2
-1
-2
-1
-0
-1
-0
-2
-1
-2
-1
1
7
7
2
-0
-0
-0
-0
-0
-0
-1
-0
-1
-0
-1
-0
9
5
0
1
0
0
0
-0,2
2
90,00%
6
80,00%
5
70,00%
60,00%
4
uency
50,00%
Freq
3 Frequency
40,00% % cumulated
30,00%
2
20,00%
1
10,00%
0 0,00%
Classes
18 90,00%
16 80,00%
14 70,00%
12 60,00%
ueny
c
10 50,00%
q
Frequency
Fre
8 40,00% % cumulated
6 30,00%
4 20,00%
2 10,00%
0 0,00%
1 2 3 4 5 6 7 8 9 10 or more
Classes
Conclusion:
The results are very interesting and with parameters optimization because of the lack of datas (two
gaps) and the data-mining or data snooping bias (which means the overoptimization of the
parameters of the model based on transient noise in the historical data).
The histogram of profits and losses shows a positive skewness, so this pairs trading strategy seems
profitable. Bootstrapping method or Monte Carlo simulations could confirm that, but with only 27
occurencies in a sample is borderline. Besides, the two gaps in the data put the trading results at
stake, because big losses could happen.
More than 66% of the trades are closed after 1 day duration or 2 consecutive trading days. The
winning rate is 74,07% and the losses are largely overwhelmed by profits. This short time exposure
on the german bond futures market is interesting because it is possible to add some identical pairs
trading strategies on the same futures account. In doing so, the profits could be larger and the losses
as well.