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Concept
Statistical arbitrage
Summary
In finance, statistical arbitrage (often abbreviated as Stat Arb or StatArb) is a class of short-term financial trading strategies that employ mean reversion models involving broadly diversified portfolios of securities (hundreds to thousands) held for short periods of time (generally seconds to days). These strategies are supported by substantial mathematical, computational, and trading platforms.
Broadly speaking, StatArb is actually any strategy that is bottom-up, beta-neutral in approach and uses statistical/econometric techniques in order to provide signals for execution. Signals are often generated through a contrarian mean reversion principle but can also be designed using such factors as lead/lag effects, corporate activity, short-term momentum, etc. This is usually referred to as a multi-factor approach to StatArb.
Because of the large number of stocks involved, the high portfolio turnover and the fairly small size of the effects one is trying to capture, the strategy is often implemented in an automated fashion and great attention is placed on reducing trading costs.
Statistical arbitrage has become a major force at both hedge funds and investment banks. Many bank proprietary operations now center to varying degrees around statistical arbitrage trading.
As a trading strategy, statistical arbitrage is a heavily quantitative and computational approach to securities trading. It involves data mining and statistical methods, as well as the use of automated trading systems.
Historically, StatArb evolved out of the simpler pairs trade strategy, in which stocks are put into pairs by fundamental or market-based similarities. When one stock in a pair outperforms the other, the under performing stock is bought long and the outperforming stock is sold short with the expectation that under performing stock will climb towards its outperforming partner.
Mathematically speaking, the strategy is to find a pair of stocks with high correlation, cointegration, or other common factor characteristics.
Official source
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