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Paul,
The last I looked at it, one component of AIQ's software was called
MatchMaker. It is very powerful in doing things like what you want, which is
correlation analysis. Their system is oriented around sector and group
organization, in addition to looking at individual stocks.
So, for example, you can take an individual stock and correlate it against
S&P groups or Investors Business Daily Industry Groups and see which one it
correlates best with, or you could even go to the extreme and correlate
every stock with every other stock and see where high correlations exist.
Or, as you want to do, you can create a group of stocks and correlate that
against whatever you want.
After doing that, you can get some coincidental correlations (like Coca Cola
correlating with Yahoo), so you would do some coarse fundamental filtering
so it makes sense.
I hope this helps.
Neil
| -----Original Message-----
| From: Paul [mailto:paltman@xxxxxxxxxxx]
| Sent: Tuesday, June 23, 1998 9:50 PM
| To: omega-list@xxxxxxxxxx
| Subject: Bread-basket of stocks as proxy for index
|
|
| Folks:
|
| I need to understand what logical reasoning is used to
| concoct a bread
| basket of stocks as a proxy for an stock index.
|
| Let's suppose that I have an index of 100 stocks, but no convenient
| derivatives are traded on it.
|
| I want to create a bread basket of 8 stocks that optimally
| correlate with
| the index, and then to trade those 8 stocks. How is this
| done? IOW, how
| do I choose the stocks from a known universe of potential
| candidates (some
| of which may not even be in the index), and choose
| weightings such that
| I've optimally represented the daily moves of the index?
|
| I'll guess that there's an elegant stats solution to this,
| other than an
| ugly brute force one like having a computer crunch out a
| zillion random
| weightings and taking the best one.
|
| BTW, is it possible that some of the candidates with the worst
| correlations, will take on magical properties when properly
| combined with
| other poor performers? I.e., is it even theoretically
| possible to get
| great correlation with the index from a mix of candidates that, by
| themselves, may have terrible correlation?
|
| Hope I've phrased the question precisely enough. I'm pretty
| fuzzy about
| where to get started with this, though I'll bet it's done
| all the time by
| the big brokerage firms in their program trading and index arbitrage.
|
| Thanks for any help.
|
| -Paul
|
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