This is a very useful study. However, IMO, it is 100% curve fit.
Every parameter that is used to develop the study (e.g. std)
would need to be updated in an online fashion in order to have significant usefulness.
I would be thrilled to see the same study started at some anchor window
(example 10 years) and then walked forward on some periodic basis,
with parameters apriori estimated and observations updated out of sample, accordingly.
The resulting equity curve would far more likely represent a realistic basis.
I would expect volatility to be less smooth with this pragmatic approach.
Not in any way to discredit the tremendously useful work you shared,
but very important to clarify and hopefully everyone here understands why.
Looking back through this thread, I see that some have already touched upon the stability issue.The same issue that plagues mean reversion/ARB or momentum strategies.
The results only make practical sense looked at from some type of cross validated perspective.
Here's one of my favorite graphical illustrations of this problem:
As for the equityâ€“curve based application, the theoretical concepts will work on any multivariate time series.An intuitive illustration is to simply take two sine wave signals 180Â° out of phase and add them; the net result will be a perfect cancellation of excursions about the mean, leaving only the underlying mean present.