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Understand Statistical Arbitrage (StatArb): pairs trading, cointegration testing (Engle-Granger), z-score signals, and mean reversion modeling.
Statistical Arbitrage (StatArb) is a quantitative trading strategy that exploits temporary statistical mispricings among historically cointegrated financial instruments while maintaining a market-neutral posture.
Pioneered by Gerry Bamberger and Morgan Stanley's Automated Trading Desk in the 1980s, StatArb remains a cornerstone strategy for quant funds.
Correlation measures co-movement of short-term returns. Cointegration tests whether a linear combination of non-stationary price series forms a stationary, mean-reverting spread over time.