Statistical Arbitrage

 

Statistical arbitrage opportunities arise because long-term investors create price impact in the securities they seek to accumulate or liquidate. The identification of statistical arbitrage, a statistical price-inefficiency of one or more assets based on the expected value of these assets, enable us to form the basis of our investment model. A profitable return driver is captured and applied to an investment strategy by an understanding of the responsible factor in combination with confirmed results of statistical analysis.

A price movement in the equity market can be derived either from fundamental, technical or behavioural factors. Company earnings growth as a fundamental factor has a significant impact on equity returns over periods longer than five years, but fails to explain significant price movements in shorter time periods. Our analysis shows that within short-term time frames, technical and behavioural factors are repeatedly causing temporary imbalances between supply and demand generating verifiable and exploitable price deviations.

Examples of price deviations driven by non-fundamental factors: 

1. Due to limited liquidity in equity markets, large orders have significant price impact in individual stocks causing market volatility and temporary drifts in equity prices.

2. Investors generally increase their equity exposure after a longer period of rising markets and decrease exposure after a longer period of weak markets. Consequently, the price-trends get extended which signals that prices eventually will revert to fundamentally fair values.

3. Historically, market participants have paid an excessive premium for growth-stocks compared to value-stocks. Eventually when growth expectations diminish equity prices for growth stocks are likely to reverse . This ineffeciency have benefited the long-term performance of low-volatility stocks compared to high-volatility stocks.  

4. Implied volatility has historically been structurally priced with a premium to realized volatility, hence investors have paid an excessive price for portfolio protection.