Stat Arb

The point of statistical arbitrage is to make markets consistent. For example, if

  • GBP trades against USD at 2:1, and
  • USD trades against JPY at 10 000:1, then
  • GBP had better be trading against JPY at 20 000:1 !!

! Anything else wouldn’t make sense. Wouldn’t be fair either. The Japanese shouldn’t get a better or worse deal vis-à-vis the British than anybody else.

So stat arbs look for inconsistencies across markets — across currencies, products, different issues of the same stock — and trade against them.


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