I'm trying to come up with a reasonable and mostly mathematical way to trade signals between two people with interests in collaboration but still wary and skeptical. The idea being that you start with trading the signals with weakest alpha.
However, it's not as simple as that, as the signal might not be appropriate given your own current collection of signals because of overlap and portfolio risk. Ie, you want to get a signal that will enhance not just your own predictive power, but also improve your over all portfolio risk.
- What would be the best way to measure and present the alpha in the signal you wish to trade? Would pearsons correlation be reasonable?
- What would be the best way to represent what you're looking for? Currently I'm thinking sharing the results of my signals on historical data (without revealing the signals themselves), and if the other side of the trade has a signal that can improve them within the context of agreed upon portfolio theory, than we're good to go.
- Any recommendations on the portfolio theory to use here?
Note this would be a private transaction, not a public one, so leaking a little bit of information is OK.