Statistical arbitrage in jump-diffusion models with compound Poisson processes

Erdinc Akyildirim, Frank J. Fabozzi, Ahmet Goncu and Ahmet Sensoy
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Erdinc Akyildirim: University of Zurich, Department of Banking and Finance
Frank J. Fabozzi: EDHEC Business School
Ahmet Goncu: Department of Financial Mathematics

Annals of Operations Research, 2022, vol. 313, issue 2, No 31, 1357-1371

Abstract: Abstract We prove the existence of statistical arbitrage opportunities for jump-diffusion models of stock prices when the jump-size distribution is assumed to have finite moments. We show that to obtain statistical arbitrage, the risky asset holding must go to zero in time. Existence of statistical arbitrage is demonstrated via ‘buy-and-hold until barrier’ and ‘short until barrier’ strategies with both single and double barrier. In order to exploit statistical arbitrage opportunities, the investor needs to have a good approximation of the physical probability measure and the drift of the stochastic process for a given asset.

Keywords: Statistical arbitrage; Jump-diffusion model; Compound Poisson process; Monte Carlo simulation (search for similar items in EconPapers)
JEL-codes: C60 G11 G12 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10479-021-03965-w

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