Statistical Arbitrage Trading Strategies and High Frequency Trading
36 Pages Posted: 16 Sep 2012 Last revised: 19 Feb 2013
Date Written: September 12, 2012
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: Suggested Citation