Comment on Live Example - 2

sumit m commented on 22 Jun 2018, 12:01 AM

Hi Karthik, thanks for the prev response!!

I have set up few other trades using regression data from 12th june excel and am tracking the trades. Pardon me for a long post ahead.

My question are on another trade setup between Andhra – Allahabad bank pair. Set up – (Allahabad Bk = y & Andhra Bk = x, Beta = 0.76. Z score was -1.72 at the time of trade). To make a beta neutral pair, I did long on Andhra BK(10000 lot), short Allahabad Bk(10000 lot) and long stocks of allahabad Bk (2346 Stocks in spot). What happened is that trade moved in favour and z score changed to -1.68 but profit went down due to excessive loss in 2346 extra stocks I purchased for beta neutrality. If I remove this long position than my actual profit has gone up since the trade execution.

1: Is it that by using beta neutrality I did a trade off between risk of z-score going further away from mean & amount of profit that pair will make If z score goes toward mean ?
2: Should we make every pair beta neutral?
3: Practically how long can we use same set of regression data without calculating again?
4: If we find a particular pair has stationary residual, will the pair remain intact unless their is substantial change in fundamentals of any stock. In other words, do we need to keep on running adf test on a particular pair very often?

Thanks again

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