Risk Arbitrage: Statistical arbitrage

Statistical arbitrage

Statistical arbitrage is very often overlapped with long/short pair trading as well as other sophisticated quantitative techniques, where advanced trading technologies are used. Statarb trading usually involves a “black box”. This is a computer model which has a programmed set of criteria which triggers a buy or sell signal when certain financial variables are met. For example a buy signal could compare a stock previous P/E to the 90 day moving average P/E or use certain sophisticated fundamental as well as technical analysis to trigger buy and sell orders directly to the exchange. These models are very often created by professional scientists and mathematicians who are skilled at back testing using advanced computer programs. Statistical arbitrage is also involved with the miss pricing of derivatives where the derivative is selling away from its quantitatively derived fair value price. Well known quantitative statistical arbitrage funds include Barclays Global Investors and Renaissance Technologies.