Statistical arbitrage in the U.S. equities market¶
Avellaneda, M., & Lee, J. (2010). Statistical arbitrage in the U.S. equities market. Quantitative Finance, 10(7), 761-782.
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Primes¶
- Arbitrage (Finance)
- If tech stocks and semiconductor suppliers historically move together (correlation 0.85), but recent market stress caused semiconductors to decline 15% while tech remained flat, a stat-arb trader shorts tech and longs semiconductors, betting the gap closes—a strategy Avellaneda and Lee (2010) operationalize through PCA-based residual factor decomposition on U.S. equities and demonstrate to deliver positive but declining Sharpe ratios as competition intensifies.
This sourceOperationalizes statistical arbitrage via PCA and ETF-based residual factor decomposition on U.S. equities (idiosyncratic returns modeled as mean-reverting); documents positive but secularly declining Sharpe ratios (PCA strategy Sharpe ~1.44 over 1997–2007, falling to ~0.9 in 2003–2007) as the strategy is increasingly crowded.
- If tech stocks and semiconductor suppliers historically move together (correlation 0.85), but recent market stress caused semiconductors to decline 15% while tech remained flat, a stat-arb trader shorts tech and longs semiconductors, betting the gap closes—a strategy Avellaneda and Lee (2010) operationalize through PCA-based residual factor decomposition on U.S. equities and demonstrate to deliver positive but declining Sharpe ratios as competition intensifies.
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