I have a model to compute the conditional expectation and variance for a return series, given various factor returns. Initially attempted to trade the deviations of actual return for the day from the calculated conditional expectation if the deviations are greater than a threshold multiple of conditional variance. However quickly realized that turnover is too high and the costs kill all profits.

My second attempt was, to sum up, the deviations (actual return - conditional expectation) for a predefined window length. But I don't know how to calculate the thresholds given that I now have a series of conditional variances for the window length? Should I average them and multiply by square root of window length? Any suggestions?



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