Statistical Arbitrage

Statistical arbitrage, also known as "stat arb," is a trading strategy that uses quantitative models to identify price discrepancies between related financial instruments. It involves buying underpriced securities and selling overpriced ones based on statistical relationships, typically aiming to exploit short-term inefficiencies in the market. Statistical arbitrage relies heavily on mathematical models, algorithms, and large datasets to find and execute trades, often in high-frequency trading environments.

Example

A trader might use statistical arbitrage to buy one stock and sell a closely correlated stock when their price relationship deviates from the historical norm, expecting the prices to converge over time.