Statistical Arbitrage

Statistical arbitrage has been a popular device which uses statistical learning machineries to study market prices and trading patterns, identify arbitrage opportunities, evaluate profit and risks of possible arbitrage positions and then uses statistical analysis to develop suitable trading strategies. This chapter primarily focuses on pairs trading as it has a close connection with the notion of cointegrations. It discusses how pairs trading identifies cointegrated time series, illustrating the basic idea of pairs trading by considering the pair: Bank of China Hong Kong (BOCHK) and Bank of East Asia (BEA). By identifying persistent anomalies that violate the efficient market hypothesis, statistical methods can be used to create a trading strategy to generate profit with high probability. The chapter illustrates the idea of cointegration pairs trading strategy, considering the 42 stocks of Hang Seng Index Components. Controlled Vocabulary Terms arbitrage; cointegration methods; statistics; time series; trading