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Quantitative Finance · Glossary

What is Synthetic twin?

Definition 4.3 Strategies I: Equities and Futures · Chapter 4 — Pairs and Baskets

A stock’s synthetic twin is a portfolio of other stocks, usually from its industry, whose returns track the stock’s over a formation period, estimated by a regression of the stock’s returns on theirs; the spread between the stock and its twin is traded like a pair’s.

Cumulative net returns of the five selection methods on the synthetic market with fifty planted pairs of substitutes. Data: s1_pairs.run.
Figure 4.3. Cumulative net returns of the five selection methods on the synthetic market with fifty planted pairs of substitutes. Data: s1_pairs.run.
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