Let's say I want to pair trade the following USD based FX :
The pairs have these price time series:
XXX/USD: (13, 15,14, 16, 15, 17,16, 19, 20)
YYY/USD: (3, 4, 3, 4, 5, 4, 6, 5, 6)
Let's assume that YYY/USD is the more independent variable and run the linear regression in R:
I use zScore of the price ratio to define entry/exit points.
I think I now have two choices: Make a Dollar neutral pair trade (buy/sell 100 USD of each instrument)
Or I can make a beta neutral trade which is I guess buy/sell an unequal dollar amount of those instruments according to the beta factor 1.42 => is that correct ?
But if yes, the latter I simply don't get how to calculate the positions using the factor.
E.g.: YYY/USD is 6, XXX/USD is 20.In a Dollar neutral strategy I would e.g. buy 16.66 YYY/USD and sell 5 XXX/USD (not sure if that is 100% correct now…).
In a beta neutral strategy…?
Or are my basic assumptions wrong?
Submitted October 19, 2020 at 09:12AM by flotschie