From Cointegration to Out-of-Sample Failure: A Pairs-Trading Case Study on PEP-KO

Davide Graziano

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arXiv · 2609.35359

From Cointegration to Out-of-Sample Failure: A Pairs-Trading Case Study on PEP-KO

Davide Graziano

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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.

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Davide Graziano. 2026-09-28. From Cointegration to Out-of-Sample Failure: A Pairs-Trading Case Study on PEP-KO. https://arxiv.org/abs/2609.35359

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