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I was trying to understand below paper

https://www.math.nyu.edu/faculty/avellane/AvellanedaLeeStatArb071108.pdf

Page 20 explains about "Entering a trade". I wan't to know clearly what it means to place a long trade in case of arbitrage using eigen portfolios.

Greatly appreciate your inputs

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The paper alternatives between using eigenportfolios and sector/industry ETFs for statistical arbitrage. For instance, sections 2.1-2 vs. 2.3.

The trade in Section 4.1 is long some stock and short an appropriate amount of sector/industry ETFs.

That being said Sections 5.3 and 5.4 discuss PCA strategies in a backtest, with relatively little additional information. It seems they are using the approach described at the beginning of Section 5 (basically they regress the stock against 15 or so eigenportfolios and go long the stock and short the eigenportfolios based on the beta, assuming I'm reading it correctly).

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  • $\begingroup$ Again these eigen portfolios doesn't really exists in market. Putting a long trade mean finding net quantities of all stocks comprising 15 eigen portfolios? Thanks $\endgroup$ Oct 26 '14 at 9:11
  • $\begingroup$ If you were implementing Section 5.3-4 in practice, then yes, you'd net things out across all the different arb trades you're making and betas on each portfolio to have to figure out how much of each stock to buy. $\endgroup$
    – John
    Oct 26 '14 at 14:23

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