An improved test for statistical arbitrage

Robert Jarrow (), Melvyn Teo, Yiu Kuen Tse and Mitch Warachka

Journal of Financial Markets, 2012, vol. 15, issue 1, 47-80

Abstract: We improve upon the power of the statistical arbitrage test in Hogan, Jarrow, Teo, and Warachka (2004). Our methodology also allows for the evaluation of return anomalies under weaker assumptions. We then compare strategies based on their convergence rates to arbitrage and identify strategies whose probability of a loss declines to zero most rapidly. These strategies are preferred by investors with finite horizons or limited capital. After controlling for market frictions and examining convergence rates to arbitrage, we find that momentum and value strategies offer the most desirable trading opportunities.

Keywords: Bootstrap; Momentum strategy; Statistical arbitrage; Value strategy (search for similar items in EconPapers)
JEL-codes: C12 G12 G14 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:15:y:2012:i:1:p:47-80

DOI: 10.1016/j.finmar.2011.08.003

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