WHAT IS STATISTICAL ARBITRAGE?

from wikipedia:

In the world of finance and investments, statistical arbitrage is used in two related but distinct ways:

  • In academic literature, "statistical arbitrage" is opposed to (deterministic) arbitrage.[1] In deterministic arbitrage, a sure profit can be obtained from being long some securities and short others. In statistical arbitrage, there is a statistical mispricing of one or more assets based on the expected value of these assets. In other words, statistical arbitrage conjectures statistical mispricings of price relationships that are true in expectation, in the long run when repeating a trading strategy.
  • Among those who follow the hedge fund industry, "statistical arbitrage" refers to a particular category of hedge funds[2] (other categories include global macroconvertible arbitrage, and so on). In this narrower sense, statistical arbitrage is often abbreviated as Stat Arb or StatArb. According to Andrew Lo, StatArb "refers to highly technical short-term mean-reversion strategies involving large numbers of securities (hundreds to thousands, depending on the amount of risk capital), very short holding periods (measured in days to seconds), and substantial computational, trading, and information technology (IT) infrastructure".[3]

STAT-ARB RESEARCH/PAPERS

  • Relative Implied Volatility Arbitrage with Index Options
    • Author's use relative volatility forecasts between liquid index options as long/short factor for simulated options trading strategy. The simulation models transaction costs but has other potential implementation pitfalls that traders/investors need to consider in their strategy evaluation.