Statistical Arbitrage Trading Strategies and High Frequency Trading

36 Pages Posted: 16 Sep 2012 Last revised: 19 Feb 2013

See all articles by Thomas A. Hanson

Thomas A. Hanson

Kent State University - Department of Finance

Joshua Hall

Kent State University - College of Business Administration

Date Written: September 12, 2012

Abstract

Statistical arbitrage is a popular trading strategy employed by hedge funds and proprietary trading desks, built on the statistical notion of cointegration to identify profitable trading opportunities. Given the revolutionary shift in markets represented by high frequency trading (HFT), it is unsurprising that risks and rewards have changed. This paper explores the effect of HFT volume on statistical arbitrage profitability, and reports three trends in the data. First, higher levels of comovement due to HFT cause more stock pairs to be cointegrated. Second, profitability from statistical arbitrage remains steady among the deciles with the most HFT. Third, the range of profitability is larger in more recent years. These findings suggest that HFT increases correlation and volatility and have a direct impact on statistical arbitrage trading strategies.

Keywords: statistical arbitrage, pairs trading, cointegration, high frequency trading

JEL Classification: G12

Suggested Citation

Hanson, Thomas A. and Hall, Joshua, Statistical Arbitrage Trading Strategies and High Frequency Trading (September 12, 2012). Available at SSRN: https://ssrn.com/abstract=2147012 or http://dx.doi.org/10.2139/ssrn.2147012

Thomas A. Hanson (Contact Author)

Kent State University - Department of Finance ( email )

College of Business Administration
P.O. Box 5190
Kent, OH 44242-0001
United States

Joshua Hall

Kent State University - College of Business Administration ( email )

P.O. Box 5190
Kent, OH 44242-0001
United States

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