Rumors of Statistical Arbitrage’s Death Greatly Exaggerated

Crushingly disappointing, no doubt, to market efficiency sorts, there are still more $20-bills lying on the statistical arbitrage sidewalk:

The Statistics of Statistical Arbitrage
Financial Analysts Journal
Robert Fernholz and Cary Maguire, Jr.
September/October 2007, Vol. 63, No. 5: 46-52
(doi: 10.2469/faj.v63.n5.4839)

Abstract

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.

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