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The point is that there may exist a subset of n stocks the ETF (for a total of N stocks) component which can explain let's say 90% of the ETF evolution, since the the remaining N-n are higly correlated to the appropriate weighted sum of the n stokcs, so that the effectively n stocks are enough...

For the selection of stocks to trade against the etf, would it be useful to diagonalize the covariance matrix, to get most important eigenvectors? I think a similar approach is used in index arbitrage. I think you should probably wait covariance using the weights of the stocks in the etf...

Factors analysis has nothing to do to technical analysis. Factors can be considered "factor" which are unpredictable and have influence on a given stock for example. One is the market, other can be gold, oil, inflation etc. Hedge funds like to neutralize all these factor by taking factor...

I read this paper,and is basically an extension of LO strategy,which is cited, and is quite easier to understand. If you know how to automate it, and trade it with medium capitalization stock I think these strategies work,since this market is too small for big hedge funds.. There are some...

Hello, and thank you very much for your post on your experience on stat arb for small investors. I have done some research and I found that looking for example at xfn, a canadian financial ETF. the spread is about 1/20 of the total size of the position to trade (this is due to the prize of...