Just as the titled says. With regards to pair trading, does anyone know a methodology in determining the best combination of basket of stocks to pair trade.
That is pair trading 'N' basket of stocks to 'M' basket of stocks. How do you determine N and M.
I've tried searching online but to no avail.
Edit: Just to add abit more colour. Suppose I've tested cointegration for 1 to 1 pairs of stocks in a huge sample of stocks. Of those cointegrated pairs I've back and forward tested with my rule based trading system. But I want to take it one step further by pair trading between basket of stocks. The only way I can think is to run every possible combination of baskets, test cointegration and back/forward test. Which would either make my pc explode or take a very long time. Can I know beforehand (using a metric or methodolgy) that adding 'this' stock into the basket is beneficial or not.