Need some expert advice and suggestions:
I am trying out pairs trading or statistical arbitrage (as traders say). But even if two price series are co-integrated (ADF test, Hurst exponent, Ornstein–Uhlenbeck tests etc) and correlated, I see that the normalized prices of a pair always end up diverging in the end and never converging again even though they will move in a pretty similar fashion. Example: DAX (German index) and CAC40 (French index) are both co-integrated and well correlated.
In particular, I noticed two things that depend on the starting point of the normalized price series-
- Either the two normalized prices will first show mean reverting nature but then they diverge away even though they move in a similar fashion never to converge again.
- Or the two normalized prices would diverge from the very beginning even though they move in a similar fashion.
It always depend on the starting point. Any experts here would kindly tell me what is the reason or if I am doing something wrong here? Would really appreciate your comments. Thanks in advance