I've been running some backtests of a pair trading strategy on 1 year worth of 5 min bars of two securities and I've noticed pretty poor returns, especially once transaction costs are taken into account. As a sanity check I ran a few statistical tests on the residuals spread in MATLAB:
- Augmented Dickey-Fuller Test rejected null with $p < 0.001$
- Lilliefors Test rejected null with $p < 0.001$
- (as an aside) Engle's ARCH Test rejected null with $p \sim 0$
This all begets the question, why are the returns so poor for a seemingly perfectly cointegrated pair? The potential factors I'm considering are poor choice of bar size, the data needs to be filtered, or I need to account for volatility somehow. Any help would be appreciated.