Exclusion of 'negative hedge ratio' stocks from basked (IndexArb, XLE example)

AI & Machine learning
1

Course Name: Mean Reversion Strategies In Python, Section No: 13, Unit No: 4, Unit type: Notebook

In section 13, Unit 1 we said to exclude stocks with 'negative regression coefficient' (hedge ratio) to avoid be "double" long/short a stock.

Therefore: Having the top-10 stocks and their hedge ratios, should we not have excluded the two stocks with negative hedge ratio to calculate basket_MV?

Thanks for answer! 

2

Hi Roland,



Yes you are correct. We will only take the stocks with a positive hedge ratio. Thanks for pointing this out! The notebook has been updated.



Thanks,

Akshay

3

Thanks for clarifying! R