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An improved test for statistical arbitrage


  • Jarrow, Robert
  • Teo, Melvyn
  • Tse, Yiu Kuen
  • Warachka, Mitch


We improve upon the power of the statistical arbitrage test in Hogan, Jarrow, Teo, and Warachka (2004). Our methodology also allows for the evaluation of return anomalies under weaker assumptions. We then compare strategies based on their convergence rates to arbitrage and identify strategies whose probability of a loss declines to zero most rapidly. These strategies are preferred by investors with finite horizons or limited capital. After controlling for market frictions and examining convergence rates to arbitrage, we find that momentum and value strategies offer the most desirable trading opportunities.

Suggested Citation

  • Jarrow, Robert & Teo, Melvyn & Tse, Yiu Kuen & Warachka, Mitch, 2012. "An improved test for statistical arbitrage," Journal of Financial Markets, Elsevier, vol. 15(1), pages 47-80.
  • Handle: RePEc:eee:finmar:v:15:y:2012:i:1:p:47-80
    DOI: 10.1016/j.finmar.2011.08.003

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    References listed on IDEAS

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    Cited by:

    1. Ahmet Göncü, 2015. "Statistical arbitrage in the Black-Scholes framework," Quantitative Finance, Taylor & Francis Journals, vol. 15(9), pages 1489-1499, September.
    2. Focardi, Sergio M. & Fabozzi, Frank J. & Mitov, Ivan K., 2016. "A new approach to statistical arbitrage: Strategies based on dynamic factor models of prices and their performance," Journal of Banking & Finance, Elsevier, vol. 65(C), pages 134-155.
    3. Dare, Wale, 2017. "Testing efficiency in small and large financial markets," Economics Working Paper Series 1714, University of St. Gallen, School of Economics and Political Science.
    4. Tim Gebbie & Fayyaaz Loonat, 2016. "Learning zero-cost portfolio selection with pattern matching," Papers 1605.04600,

    More about this item


    Bootstrap; Momentum strategy; Statistical arbitrage; Value strategy;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading


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