Okay. I just did. Did I misread you? You said: "whereas volatility-weighted would be an adjustment to compensate for the lack of correlation." I just showed that mathematically that volatility weighted is only the solution when correlation is 100%... so it's not the lack of correlation.
wtf? I was showing that under the cannonical derivation of beta hedge ratio, the vol ratio is the beta assuming 100% correlation, which you argued is incorrect. what does any of this have to do with constant volatility? And for the record, my simple derivation doesn't assume constant volatility. One can use forward volatility as well. In any case, the hedge ratio is only the vol ration under 100% correlation, not zero - which is what you stated. I'm beginning to think you have no clue what any of this means and are just being argumentative for being arguentative's sake.
Nor does a correlated pair imply a pair-spread trade. Not sure why anyone is even debating correlation at all. To answer OP/OQ, look up cointegration.
Cannonical derivation of beta hedge ratio? ARE YOU SERIOUS??????? How about a practical derivation? Please, enlighten me. AND WHEN DID I ARGUE THE BETA ASSUMING 100% correlation is incorrect? I didn't even mention betas. Forward VOLATILITY, YOU CAN'T BE SERIOUS??? Did your foward volatility model predict the 2008 4q move? Your assumptions and implicities may be great for your sales trading job but this isn't a discussion board for RBC or JPM. And frankly, we are talking about spreading stocks where you might want to consider earnings or rebalancing when VOL WEIGHTING the spread. I would be more than happy to discuss convexity or modified durations with you another day.
Okay. First, I'm not a sales & t; So let's put all the resentment aside. Second, you said in your earlier post that I was wrong and that vol ratio is when there is no correlation; That's so nonsensical that it's stupid. But please, show me how that actually works. A pair trade requires that the pair is correlated. So show me how it's possible to construct a hedge ratio (which is exactly what beta is, convexity adjusted or not) when there is no correlation. Please, enlighten me. You are a child. Completely ignorant of how this all works. The only thing more pathetic than your attempt at discussing this topic is the fact that the rank amateurs here can't distinguish what you are saying and what I'm saying. Go forth, internet tough guy, you can claim that you've won this debate. Meanwhile, I got some portfolios to manage - in real life (you know, that place outside of your mother's basement)
In this case if you trade it 1:1, you'll tie up $4600 and if you trade it 1:2, you'll tie up $6100 per position.
Can someone tell me why you would ever want to go into a 1:1 or 1:2 ratio in these 2 in the first place? doesnt seem to make much sense to me.......thanks
Where did I say vol ratio is when there is no correlation? A pair trade requires that the pair is correlated? That is a very broad stroke sir, especially from someone who memorizes from a text book. Did you just finish school?