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Country-ETF Distance Pairs
sum-of-squared-deviations selection on international single-country ETFs
The Gatev-style distance method (normalized price series, smallest sum-of-squared-deviations) on a compact international country-ETF universe is a different pair-selection mechanic and a different sub-universe than sector cointegration; ETFs are baskets, so single-name news rarely breaks convergence. Known caveat: the source paper's in-sample Sharpe looks data-mined, so this must be treated as a decay-risk candidate.
Universe
~22 liquid single-country ETFs (e.g. EWA, EWC, EWG, EWQ, EWU, EWJ, EWZ, EWW, EWY, EWT, EWH, EWS, EWL, EWP, EWI, EWD, INDA, FXI, EWM, EPOL, EIDO, EZA) — daily total-return series.
How it works
120-day formation ranks pairs by normalized-price SSD; trade the top ~5 pairs over a 20-day window, open when divergence exceeds ~1.0–2.0 historical sigma, exit on convergence or after 20 days, equal-weight, daily monitoring.
Expected performance
Research-derived Sharpe estimate: 0.4–0.9. source paper ~1.66 in-sample and a related study ~1.43 net, but Quantpedia's out-of-sample rebuild is negative — apply a heavy realism discount).
Backtest this idea with SignalChain
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/signalchain Distance-method pairs trading on ~22 single-country ETFs, 120-day SSD selection of top 5 pairs, 20-day trade window, divergence entry, convergence exit
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Research & sources
- quantpedia.com — quantpedia.com
- papers.ssrn.com — papers.ssrn.com
- link.springer.com — link.springer.com
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