Mean Reversion strategy: Long-Short Portfolio for currency pairs

AI & Machine learning
1

Hi,

I was wondering whether Long-Short Portfolio strategy can be applied or not in FOREX/Commodities (in addition to Stocks) since I primarily trade CFD in FOREX/Commodities.



From the course it is also not clear the rationale behind this strategy. I would like to have more info on this strategy



Thanks



Raimondo

2

Hi Raimondo,



You can use Long Short portfolio to trade CFD in FOREX/Commodities  The rationale for this strategy is to make a profit while maintaining a net market risk of 0 or eaul long and shorts in a market. So if you are trading commodities, then long-short models would have an equal number of longs and shorts in all the commodities combined. This will effectively negate any effect of commodities specific fundamental/macroeconomic news.

3

thank you.

There is another question that comes to my mind when thinking about Long-Short Portfolio.



Since this strategy relies on cross-sectional mean reversion, why is it not needed to run a CADF or better a Johansen test among all the assets that constitutes the portfolio?



thanks again



Raimondo

4

CADF or Johanssen is used to create a mean-reverting spread to buy and sell at the extremes. For a long-short portfolio we are not looking for a mean reversion of combination of stocks to make a profit, but we are looking to hedge the market risk by taking equal long and short. The purpose of both methods is different.