Came across a method involving pairs in the book Hedge Fund Market Wizard:
Given a Stock(or Collective of instruments)that follows closely to say Dow index with a beta<1(very short term) but beta~1(a week) in an uptrend. i.e.hedged, and it also falls much slower than the index when the market drops suddenly to form a profitable spread, what are the quantitative factors in implementing such a strategy (short index,long stocks)?
How to calculate the beta for a group of stocks?
What aspect of CoIntegration to look out for?
Is correlation relevant in this approach?
Can options of a similar index(e.g SPY) be used to mimic the lagging beta part?