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.
Bootstrap, Momentum strategy, Statistical arbitrage, Value strategy
Corporate Finance | Finance and Financial Management | Portfolio and Security Analysis
Journal of Financial Markets
JARROW, Robert; TEO, Melvyn; TSE, Yiu Kuen; and WARACHKA, Mitch.
An Improved Test for Statistical Arbitrage. (2012). Journal of Financial Markets. 15, (1), 47-80. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/2966
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