Alina Khay

Alina Khay

Statistical Arbitrage: Cointegration, Mean Reversion and Model Risk

How pairs-trading research is structured—and why unstable relationships, costs and selection bias can erase the apparent edge.

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Alina Khay
Jan 17, 2025
∙ Paid
Illustration 1 in “Statistical Arbitrage in Algorithmic Trading: A Quantitative Approach”.

Statistical arbitrage is a family of relative-value strategies, not a promise of automatic profit. A typical design tests whether related assets exhibit a sufficiently stable spread, defines a rule for unusually large deviations and evaluates whether convergence survives realistic trading costs. Correlation alone is not enough: the central research questions are whether the relationship is statistically defensible, available at the time of the decision and stable outside the period used to discover it.

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