Number: 46936
Title: Statistical Arbitrage
Concentration: TBA
Prerequisites: 46921 - Introduction to Probability AND 46923 - Introduction to Statistical Inference AND 46926 - Linear Financial Models AND 46929 - Financial Time Series
Description: This course intends to provide students with concepts and techniques for statistically and econometrically based trading. The course begins with the general principles of arbitrage pricing theory and the statistical nature of the price and volatility fluctuations in financial markets. It introduces the ideas of market neutral strategies and provides the statistical techniques required for identifying and exploiting pricing inefficiencies. Various statistical strategies will be covered including pairs trading cointegration-based trading data mining as well as strategies using the information from derivatives markets. We will demonstrate how to search for arbitrage strategies based on intra-day patterns long-term patterns multi-equity relationships. At the end we stress that statistical arbitrage is not riskless and we discuss how to assess the risk arising from model misspecification and inappropriate estimation. The topics covered are particularly relevant for proprietary trading such as in the context of hedge funds.