Statistical arbitrage

Quantitative and computational oriented trading strategy approach to equity trading. It is related to the statistical mispricing of one or more assets based on the expected value of these assets. Automated trading systems commonly make use of data mining, statistical methods and artificial intelligence techniques. One popular strategy used to be pair-trading, in which stocks are put into pairs by fundamental or market-based similarities. One stock in the pair is bought long, the other is sold short. This hedges risk from whole-market movements. Another approach is clustering a portfolio of stocks by sector and region in offsetting any beta exposure.Signals are often generated through a contrarian mean-reversion principle, but can also be formed by extreme psychological barriers, corporate activity, as well as short-term momentum. Statistical arbitrage has become a major tool for both hedge funds and investment banks.