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Introduction to Hedge Ratio Estimation Methods

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The hedge ratio estimation problem is one of the most important issues for portfolio managers.

The hedge ratio estimation methods can be divided into two:
– Single Period Method
– Multi-Period Method

In this blog post, we’ll simply go through the main concepts of each method and closely follow a paper by Lopez de Prado, M.M. and Leinweber, D. (2012). Advances in Cointegration and Subset Correlation Hedging Methods. Therefore, for further details and implementation, we would highly recommend you to read individual papers for each of the methods provided.

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Employing Machine Learning for Pairs Selection

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In this post, we will investigate and showcase a machine learning selection framework that will aid traders in finding mean-reverting opportunities. This framework is based on the book: “A Machine Learning based Pairs Trading Investment Strategy” by Sarmento and Horta.

A time series is known to exhibit mean reversion when, over a certain period, it reverts to a constant mean. A topic of increasing interest involves the investigation of long-run properties of stock prices, with particular attention being paid to investigate whether stock prices can be characterized as random walks or mean-reverting processes.

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