What is Statistical Arbitrage or StatArb?
Statistical arbitrage is a market neutral strategy as the long and short positions are carefully matched for eliminating stock beta and market risks. Usually the portfolio is constituted for tens or hundreds or different stocks, which are carefully chosen according to industry, beta, growth, previous performance, etc. Statistical arbitrage opportunities are figured out through mathematical modeling methods. Often the stocks are scored based on mean reversion principle, where stocks which should be held long or which are underperformed recently receive high scores and stocks which should be shorted or which outperformed recently receive low scores.
Statistical arbitrage strategy mainly favors hedge funds and institutional traders as it require good data mining, price analysis and price matching capabilities and automated trading systems. More over, the position size must be very high and trading costs must be very low because of very low per share return.
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