Bridge over ocean
1 September 2007 Financial Analysts Journal Volume 63, Issue 5

The Statistics of Statistical Arbitrage

  1. Robert Fernholz, PhD
  2. Cary Maguire

Hedge funds sometimes use mathematical techniques to “capture” the short-term volatility of stocks and perhaps other types of securities. This sort of strategy resembles market making and is sometimes considered a form of statistical arbitrage. This study shows that for the universe of large-capitalization U.S. stocks, even quite naive techniques can achieve remarkably high information ratios. The methods used are quite general and should be applicable also to other asset classes.

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