Dynamic Cointegration in Pairs Trading: Evidence from Treasury and Equity Markets

Dynamic Cointegration in Pairs Trading: Evidence from Treasury and Equity Markets | Research Square window.SnipcartSettings = { analytics: { enabled: false } }; (function() { var accessVector = localStorage.getItem('access_vector') || ''; window.dataLayer = window.dataLayer || []; if (accessVector) { window.dataLayer.push({ user: { profile: { profileInfo: { snid: accessVector } } } }); } })(); (function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start':new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0],j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src='https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f);})(window,document,'script','dataLayer','GTM-K279D39R'); Browse Preprints In Review Journals COVID-19 Preprints AJE Video Bytes Research Tools Research Promotion AJE Professional Editing AJE Rubriq About Preprint Platform In Review Editorial Policies Our Team Advisory Board Help Center Sign In Submit a Preprint Cite Share Download PDF Article Dynamic Cointegration in Pairs Trading: Evidence from Treasury and Equity Markets Bin Zhou This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-7871070/v1 This work is licensed under a CC BY 4.0 License Status: Posted Version 1 posted You are reading this latest preprint version Abstract This paper presents a comprehensive empirical study on pairs trading strategies using a dynamic cointegration framework applied to both U.S. Treasury yield curves and Chinese equity markets. Unlike traditional static approaches, we introduce a rolling-window cointegration analysis to monitor the temporal stability of statistical relationships, coupled with an adaptive backtesting system that incorporates Kalman and particle filters for dynamic parameter estimation. Our methodology rigorously tests the Engle-Granger and Johansen cointegration procedures, estimates mean reversion parameters via the Ornstein-Uhlenbeck process, and optimizes trading thresholds using a grid-search mechanism. Key innovations include the integration of time-varying parameter stability analysis, real-time structural break detection, and a multi-asset comparative performance evaluation. Empirical results reveal a stark performance divergence: while the equity pair (600036.SS–000001.SS) achieved a Sharpe ratio of 1.103 and a total return of 28.98%, the Treasury yield pair (TNX–TYX) yielded a negative Sharpe ratio of -0.767, underscoring the critical role of asset class selection and regime adaptability. The study concludes that static cointegration models are insufficient in modern markets, advocating instead for dynamic, regime-aware frameworks to enhance the robustness and profitability of statistical arbitrage strategies. Physical sciences/Mathematics and computing Physical sciences/Physics Cointegration Analysis Pairs Trading Statistical Arbitrage Mean Reversion Rolling-Window Estimation Dynamic Parameter Estimation Treasury Yield Curve Chinese Equity Market Backtesting System Structural Break Detection Full Text Additional Declarations No competing interests reported. Cite Share Download PDF Status: Posted Version 1 posted You are reading this latest preprint version Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. As a division of Research Square Company, we’re committed to making research communication faster, fairer, and more useful. We do this by developing innovative software and high quality services for the global research community. Our growing team is made up of researchers and industry professionals working together to solve the most critical problems facing scientific publishing. Also discoverable on Platform About Our Team In Review Editorial Policies Advisory Board Help Center Resources Author Services Accessibility API Access RSS feed Manage Cookie Preferences © Research Square 2026 | ISSN 2693-5015 (online) Privacy Policy Terms of Service Do Not Sell My Personal Information {"props":{"pageProps":{"initialData":{"identity":"rs-7871070","acceptedTermsAndConditions":true,"allowDirectSubmit":true,"archivedVersions":[],"articleType":"Article","associatedPublications":[],"authors":[{"id":543671293,"identity":"6a83e096-41f6-4898-b992-4e76f8987fd7","order_by":0,"name":"Bin Zhou","email":"data:image/png;base64,iVBORw0KGgoAAAANSUhEUgAAAZAAAAAyAQMAAABI0h/eAAAABlBMVEX///8AAABVwtN+AAAACXBIWXMAAA7EAAAOxAGVKw4bAAAA10lEQVRIiWNgGAWjYBACNjB5gEGOvQHEMLAgXosxzwGwFgli7TrAkNgD1sJAhBY+9jMGjD/OHE7vYe8x3fCjQIKBv707Ab/DeHIMmHluHM7t4TmWdrMH6DCJM2c34NciwWPAzPDhcO5+ieRjN3iAWgwkcglrYfzx4XA6j0Ri280/xGphADosgQdoy23ibOFJK2DmOZNuCPLLbRkDCR6CfpFvP7yB8ccxa3ke9h6zm2/+2Mjxt/fi18LAwGH+g4GhGc7lIaAcBNgfAIk6IhSOglEwCkbBiAUAEhRCNwefRY8AAAAASUVORK5CYII=","orcid":"","institution":"Paris School of Business","correspondingAuthor":true,"prefix":"","firstName":"Bin","middleName":"","lastName":"Zhou","suffix":""}],"badges":[],"createdAt":"2025-10-15 18:53:13","currentVersionCode":1,"declarations":"","doi":"10.21203/rs.3.rs-7871070/v1","doiUrl":"https://doi.org/10.21203/rs.3.rs-7871070/v1","draftVersion":[],"editorialEvents":[],"editorialNote":"","failedWorkflow":false,"files":[{"id":96043833,"identity":"db88a505-faa0-41bd-9c0b-de5110d9404b","added_by":"auto","created_at":"2025-11-17 05:03:24","extension":"json","order_by":0,"title":"","display":"","copyAsset":false,"role":"acdc-reference","size":11254,"visible":true,"origin":"","legend":"","description":"","filename":"7809474251174256accf58fbcd1e51ba.json","url":"https://assets-eu.researchsquare.com/files/rs-7871070/v1/4365aa82310b45c74a25e6a0.json"},{"id":100735816,"identity":"6a38ec14-5826-4c1c-b7d4-3b0f68f6f774","added_by":"auto","created_at":"2026-01-20 22:30:14","extension":"pdf","order_by":1,"title":"","display":"","copyAsset":false,"role":"manuscript-pdf","size":1503370,"visible":true,"origin":"","legend":"","description":"","filename":"paper3.pdf","url":"https://assets-eu.researchsquare.com/files/rs-7871070/v1_covered_cfd6b5db-7ca7-4818-b468-201b4db11db8.pdf"}],"financialInterests":"No competing interests reported.","formattedTitle":"Dynamic Cointegration in Pairs Trading: Evidence from Treasury and Equity Markets","fulltext":[],"fulltextSource":"","fullText":"","funders":[],"hasAdminPriorityOnWorkflow":false,"hasManuscriptDocX":false,"hasOptedInToPreprint":true,"hasPassedJournalQc":"","hasAnyPriority":false,"hideJournal":true,"highlight":"","institution":"","isAcceptedByJournal":false,"isAuthorSuppliedPdf":true,"isDeskRejected":"","isHiddenFromSearch":false,"isInQc":false,"isInWorkflow":false,"isPdf":true,"isPdfUpToDate":true,"isWithdrawnOrRetracted":false,"journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true},"keywords":"Cointegration Analysis, Pairs Trading, Statistical Arbitrage, Mean Reversion, Rolling-Window Estimation, Dynamic Parameter Estimation, Treasury Yield Curve, Chinese Equity Market, Backtesting System, Structural Break Detection","lastPublishedDoi":"10.21203/rs.3.rs-7871070/v1","lastPublishedDoiUrl":"https://doi.org/10.21203/rs.3.rs-7871070/v1","license":{"name":"CC BY 4.0","url":"https://creativecommons.org/licenses/by/4.0/"},"manuscriptAbstract":"This paper presents a comprehensive empirical study on pairs trading strategies using a dynamic cointegration framework applied to both U.S. Treasury yield curves and Chinese equity markets. 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