Let's say we have a time series for an illiquid future and we would like to replicate this time series using two time series for liquid futures using daily rebalancing. What would be a good approach to do that?

My idea was to use linear regression to find the proportions of each liquid future. Then I would maintain these proportions throughout by daily rebalancing one future and then maybe do a weekly rebalancing on the second one. Does this make sense?

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    $\begingroup$ Linear regression makes senses, it may take more than 2 to get the desired tracking error. You will also want to compare daily vs weekly vs monthly rebalancing and so forth. $\endgroup$ – pyCthon Nov 16 '17 at 14:59

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