Pairs Trading With Country Etfs

The three-gate gauntlet · genuine only if it clears all three and survives adversarial refutation

Gate 1

Survivorship-free

immune

clean panel

Gate 2

Placebo ≥ P95

not run

Gate 3

Cost-aware net

RF +0.04

positive, not certified

Failedfailed refutation

Worst 12-month leg (RF)-1.00

−1.00 floor0

Every strategy here — winners included — loses in its worst 12 months. Depth is honest context, not the verdict.

Cleared the numeric checkpoints it reached but failed adversarial refutation — the positive figure is market beta or a single-period jackpot, not a repeatable edge.

Classic distance pairs trading (Gatev, Goetzmann & Rouwenhorst) applied to single-country ETFs: form the closest-tracking pairs, then trade the spread when it diverges by two standard deviations and unwind when it crosses back to the mean.

What we found

We tested GGR distance pairs on 10 single-country ETFs, taking the top-10 of 45 candidate pairs in monthly cohorts, entering on a 2-sigma divergence with a mean-cross exit and a one-day wait. The result was flat: risk-adjusted RF of 0.04, a worst-year RF of -1.0, and a peak drawdown far larger than the cumulative gross P&L. The effect is cost-fatal — each round trip requires four fills, and paying the bid-ask spread four times eats the small convergence profit. This is consistent with our stock pairs-trading result and with the well-documented post-2002 decay of the pairs effect.

How we tested it

2005–2026 test windowmodelled liquidity-aware costssurvivorship immune

Tested on a set of liquid single-country ETFs, 2005-2026. Realistic modelled costs.
Placebo / robustness test: real result vs random baskets or shuffled signals (real vs the 95th percentile of random)

Source: Gatev, Goetzmann & Rouwenhorst (2006) pairs applied to country ETFs; QuantPedia
Read the paper ↗

← The Academic Audit — all 54 studies

Research, not investment advice. “Validated” factor-legs are market-neutral diversifying building blocks with a losing worst year — none is a standalone tradeable strategy. Metrics are cost-aware and modelled (not live fills); the 2005–2026 test window is out-of-sample versus the source paper. Dollar figures are not returns and are omitted by design.