To MartinGale7 and Alan: so, what exactly is the strategy to make money? Are you just net long the portfolio? How do you decide which stocks to buy and how/when to rebalance?

Not of the basket, but of individual contracts inside it. You know what I mean,

To be used to find mispricings in a basket of highly correlated assets. Is this idea viable? Any references? How would it work in practice?

Ok, please send me the papers.What should the holding times be then?

<r>Thanks a lot for your responses, can you please look at <URL url="http://wilmott.com/messageview.cfm?catid=38&threadid=96576&STARTPAGE=16"><LINK_TEXT text="http://wilmott.com/messageview.cfm?cati ... ARTPAGE=16">http://wilmott.com/messageview.cfm?catid=38&threadid=96576&STARTPAGE=...

Explanation please? And to what part of my question this refers?

<t>1) Suppose I have 5, products, the #1 PCA is [a,b,c,d,e], what should be the rations of the positions of each contract to be hedged?2) Suppose I have the top 3 PCAs, i.e. eigenvectors of the covariance matrix. What is the formula for the hedge coefficients then? 3) Suppose I am hedging with respe...

<t>Thanks a lot.How about the other issues? I am really curious as to what do I put in the matrix of data? Textbooks warn against prices, and suggest, for example, first differences. But then, how do I find fair prices, when my matrix doesn't contain prices? I can only find fair first differences.Al...

The example given in part 3) is specific to that part, not to the general setting. Any ideas on the other topics?

<t>I want to use PCA to trade a set of related fixed income products, for intraday trading with short holding times (2mins - 30 mins)1) Do I populate the data matrix with yields or prices, and what difference does it make?2) What is a reasonable sampling rule/frequency/number of samples/lookback win...

Has anyone gone through it? How recently? How hard/advanced was it?

maratikus, can you please explain your reasoning?

Suppose you buy a stat arb pair, but you want your strategy to be allowed to buy it a few more times as it goes down. What is the optimal way to do this? How do you figure out at what points to load?Also, what are some useful metrics in general when profiling a spread?

Any idea what these might be? Anything specific in the fixed income world? I am looking into intraday strategies, holding times up to an hour or so.

<t>I am developing a pairs trade on futures contracts. I run it intraday, with holding times of ~20 min, and fixed coefficients and hedge rations, that I compute with a lookback of a few days.How can I rigorously test what is the best lookback time(how many days do I consider when I compute coeffici...