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Suppose I am trading cointegrated pairs $A_1A_2, A_2A_3, \ldots A_{k-1}A_k, A_kA_1$ and I got a signal to

  • long $A_1$, short $A_2$;
  • long $A_2$, short $A_3$;

$\cdots$

  • long $A_k$, short $A_1$.

How likely is that scenario to happen? Is it perhaps self-contradictory? Does it mean e.g. I would have a reasonable signal to only short/long the stock $A_1$ (assuming I chose the quantities for all other pairs for the shorts and longs on $A_i$ for $i = 2, 3 \ldots k$ to cancel out)

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  • $\begingroup$ Seems a very unlikely situation to worry about. In my experience the pairs chosen are completely distinct. If $A_1,A_2,A_3$ are related choose 2 of them that work well together and leave out the third one. $\endgroup$
    – nbbo2
    Commented Nov 8, 2023 at 13:46

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