What is statistical arbitrage?
The premise behind statistical arbitrage is that there’s a disparity between a stock’s ‘natural’ price based on its intrinsic value, and its actual market price. So if a situation arises where there’s a statistical mispricing between a set of securities, traders may look to exploit this.
Where have you heard about statistical arbitrage?
It’s not a strategy widely used by everyday investors as they typically don’t have the large sums of money needed to take advantage of arbitrage opportunities. You’re more likely to see it employed by hedge funds and institutional investors.
What you need to know about statistical arbitrage.
Statistical arbitrage is essentially a form of pairs trading where you go long on one stock while shorting another.
Traders look to profit when the disparity in price is corrected, but this strategy is not without risk. It largely depends on stock prices returning to their historic or forecasted normal, which doesn't always happen.
Statistical arbitrage is different to general arbitrage, which is the technique of taking advantage of a disparity between two markets.