EWY, Samsung, and SK Hynix: A Three-Leg Residual Mean-Reversion Strategy
Summary
The document develops a relative-value strategy that trades EWY against Samsung Electronics and SK Hynix, which are major ETF holdings. It argues that this same-account basket avoids several practical frictions in trading Korean cash equities against continuously quoted crypto perpetuals. A rolling log-price regression estimates the two hedge betas; the strategy standardizes the residual and enters a three-leg position when it moves beyond a threshold, then exits near the mean or after a time limit. Betas determine hedge notionals, while drift rules limit rebalancing.
The article details data checks for frozen prices, unstable regressions, small residual variation, and implausible signals. It also identifies key weaknesses: no z-based stop, no reversal while holding, and single-leg emergency cuts that can break the hedge. A two-day simulated run showed positive returns, but omitted fees, slippage, funding, and asynchronous fills. The document says cointegration tests, half-life estimates, out-of-sample validation, cost modeling, and coordinated execution remain necessary before live use.
Key ideas
- EWY’s relationship to Samsung and SK Hynix has an economic basis in its holdings, unlike a pairing selected only by historical correlation.
- A rolling log-price regression estimates hedge ratios, and the residual represents the basket’s unexplained relative deviation.
- The strategy enters when the standardized residual crosses an entry threshold and exits near its mean or after a maximum holding period.
- Data-quality checks reject frozen prices, singular regressions, unstable residual variance, and implausible signals.
- The short simulation omits important costs and execution risks, while cointegration and out-of-sample validation are still missing.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.