Statistical arbitrage and risk contagion

Xing Gao and Daniel Ladley

Journal of Economic Dynamics and Control, 2022, vol. 144, issue C

Abstract: Contagions among financial intermediaries have been shown to play a significant role in the propagation of financial distress. Contagions among assets, however, have received less attention. This paper examines the role of statistical arbitrage in connecting assets and the resulting impact on market stability. We find that statistical arbitrage stabilises markets in normal periods, however, it acts as a mechanism for risk contagion when extreme events occur. A relatively low density of statistical arbitrage improves the resilience of the system, relative to the case when none is present, while a high level results in increased susceptibility to shocks. The impact of statistical arbitrage on wealth is also considered.

Keywords: Statistical arbitrage; Financial network; Risk contagion; Market stability (search for similar items in EconPapers)
JEL-codes: C30 C63 G10 G40 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165188922002329
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:144:y:2022:i:c:s0165188922002329

DOI: 10.1016/j.jedc.2022.104528

Access Statistics for this article

Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Catherine Liu ().