Mean Reversion and Statistical Arbitrage › Key Parameters
Michael BrenndoerferDecember 27, 20251 min read
Quantitative FinanceAll chapters Part 11 of 15Quantitative Trading Strategies
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The key parameters for statistical arbitrage portfolios are:
- Number of Factors (K): The number of principal components to remove. This determines the granularity of the factor neutrality.
- Lookback Window: The period used to estimate the factor model (PCA) and residual statistics.
- Rebalance Frequency: How often portfolio weights are recalculated. More frequent rebalancing captures faster signals but increases costs.
- Gross Exposure: The total value of long and short positions, typically targeted to a specific leverage level.