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appleinvestor

Statistical Arbitrage in Low Volatility Markets

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I trade futures pairs using a mean reversion strategy called Statistical Arbitrage (StatArb). And the processes is highly dependent upon divergences from an equilibrium that is usually caused by some market event or interruption. This energy has the effect of reverberating through through price correlations and causing a divergence, which I wait until that divergence has statistical significance and then bet on its reversion to the equilibrium.

 

During times of low volatility, like now, with the VIX below or near 20, these divergences, let's call them bumps, are much smaller than when in higher volatile markets. The other problem is runaway markets, like the Nasdaq, which complicates matters even more, by skewing these bumps and reducing opportunity.

 

How do you adjust your strategy to accommodate these aberrations?

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