R-SIG-Finance community:
 
I recently posted a short paper entitled Better Hedge Ratios for Spread
Trading:
 
    http://www.quanttrader.info/public/betterHedgeRatios.pdf
 
The topic is pretty arcane but important to spread traders. A surprizing
number of textbooks and practitioners simply use ordinary least squares
(OLS) to calculate their hedge ratios, but OLS can give misleading results.
The paper shows how to use total least squares (TLS) to obtain a better
balanced spread. The needed R code is simple and included in the paper.
 
The paper is based on a lightning talk I gave at the R/Finance Conference
back in April.
 
I welcome all comments. I can't guarantee I will quickly incorporate your
feedback into the paper, unfortunately. Heck, it took me seven months just
to get out this first version.
 
Paul Teetor
Elgin, IL   USA
http://www.linkedin.com/in/paulteetor
 
"For quant traders, there are no bad days in the market. It's just more
data."
 

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