I am playing around with a custom pair trading algorithm and seem to have different results if I swap the order of the stocks. As an example, I have looked at the algorithms in the lectures and I can duplicate the problem.
I tested with the example in Lecture 45 (the basic algorithm) and swapping the order of the stocks does not matter. I get the same gain, but the zscore looks flipped (as I would expect). I used 01/01/2014- 07/30/2015, and get returns of -11.4%. Alpha, Beta, Sharpe and Drawdown are the same.
I tried Lecture 46 (a more sophisticated implementation). I changed it to work on only the 2 stocks from lecture 45 above. When I flip the order of the stocks the returns are different.
The simple lecture 45 does not use a hedge. I'm pretty sure this is it, but I don't understand it. It would think swapping the order would change the direction (long to short), but since X and Y are swapped I would long and short the same stocks.
Is there a standard practice to which stock goes first? Maybe the higher priced one?
