15. Statistical Arbitrage

  1. Ngai Hang Chan

Published Online: 28 JAN 2011

DOI: 10.1002/9781118032466.ch15

Time Series: Applications to Finance with R and S-Plus, Second Edition

Time Series: Applications to Finance with R and S-Plus, Second Edition

How to Cite

Chan, N. H. (2010) Statistical Arbitrage, in Time Series: Applications to Finance with R and S-Plus, Second Edition, John Wiley & Sons, Inc., Hoboken, NJ, USA. doi: 10.1002/9781118032466.ch15

Author Information

  1. The Chinese University of Hong Kong, Department of Statistics, Shatin, Hong Kong

Publication History

  1. Published Online: 28 JAN 2011
  2. Published Print: 13 SEP 2010

ISBN Information

Print ISBN: 9780470583623

Online ISBN: 9781118032466

SEARCH

Keywords:

  • cointegration method;
  • Hang Seng index;
  • pairs trading;
  • probability;
  • statistical arbitrage;
  • time series

Summary

Statistical arbitrage has been a popular device which uses statistical learning machineries to study market prices and trading patterns, identify arbitrage opportunities, evaluate profit and risks of possible arbitrage positions and then uses statistical analysis to develop suitable trading strategies. This chapter primarily focuses on pairs trading as it has a close connection with the notion of cointegrations. It discusses how pairs trading identifies cointegrated time series, illustrating the basic idea of pairs trading by considering the pair: Bank of China Hong Kong (BOCHK) and Bank of East Asia (BEA). By identifying persistent anomalies that violate the efficient market hypothesis, statistical methods can be used to create a trading strategy to generate profit with high probability. The chapter illustrates the idea of cointegration pairs trading strategy, considering the 42 stocks of Hang Seng Index Components.

Controlled Vocabulary Terms

arbitrage; cointegration methods; statistics; time series; trading