The Statistics of Statistical Arbitrage

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.