Pairs Trading Backtest Interview Guide
Pairs trading backtest interview guide covering pair formation, train/test separation, hedge ratios, entries, costs, exits, and examples.
Candidates validating pair selection, entry rules, costs, and risk.
Formation and trading periods should be separate
A pairs backtest should choose or estimate pairs using one period and evaluate trading rules on later data to reduce selection bias.
Hedge ratios must be point-in-time
Regression or cointegration hedge ratios should use only data available before the trading period being tested historically.
Concrete example
Estimate a pair relationship over the prior year, trade deviations over the next month, then roll the estimation window forward.
Costs can erase apparent edge
Spreads, slippage, borrow, financing, short constraints, and turnover matter because pairs trades can rebalance frequently.
Common mistakes
Candidates often pick the best historical pair and test it on the same sample. That is data mining, not clean validation.
Practice the pattern
Use the LeetQuidity curriculum and calibration to turn this topic into a focused practice plan.