Hypotheses
CCI/O REIT Pair: Rolling Maximum-Likelihood Ornstein-Uhlenbeck Spread Reversion, Dollar-Neutral Long/Short, Flat Unless |z_OU| >= 2 (USEQ DAILY, 3 parameters)
Source: Huang et al., 'On the Profitability of Optimal Mean Reversion Trading Strategies' (arXiv:1602.05858, abstract). Mechanism: build a two-stock portfolio X = ln(CCI) - B*ln(O). Choose the hedge ratio B by maximum…
Hypothesis
Source: Huang et al., 'On the Profitability of Optimal Mean Reversion Trading Strategies' (arXiv:1602.05858, abstract). Mechanism: build a two-stock portfolio X = ln(CCI) - B*ln(O). Choose the hedge ratio B by maximum likelihood so that X best fits an Ornstein-Uhlenbeck process. Trade contrarian signals from the fitted parameters. CCI/O is the paper's best out-of-sample pair (Sharpe 2.405 in-sample, 2.903 out-of-sample, not verified). Three changes make the test honest. (1) The model is re-fit every week on a trailing 252-session window, using only data available at that point. (2) Thresholds are fixed in advance rather than optimized: enter at 2 sigma_eq, exit at the mean. (3) The model must be valid before any entry: half-life <= 60 sessions. Instruments: CCI.USEQ and O.USEQ, about 25 years of daily history. We drop the HCP pair because the DOC ticker now carries a different company's history. The full paper would have to confirm the exact signal rule, the in-sample length and whether prices are log or level. Expected time flat: about 65-75% of sessions.
Analysis
On the Profitability of Optimal Mean Reversion Trading Strategies
Backtest and paper results are hypothetical. Trading involves risk of loss.