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Statistical Arbitrage

Study pairs trading, cointegration, factor residuals and the research and execution of relative-value strategies.

Why study Statistical Arbitrage?

Two assets moving together is a research observation, not yet a tradable opportunity. Statistical arbitrage connects relative-value modelling to validation, portfolio exposure and the costs of maintaining positions.

Who this is for

For learners with econometrics, portfolio construction and a disciplined backtesting workflow.

What you should be able to do

  • Compare distance, cointegration and Kalman-filter approaches to pairs trading.
  • Connect factor residuals to signal construction.
  • Evaluate validation, portfolio construction, execution and strategy risk.

An example of the work this prepares you for

A relative-value research report comparing a signal with benchmarks, stress periods, turnover and trading costs.

Prerequisites and suggested preparation

You should be comfortable with the background covered in these programmes. Equivalent knowledge from university study or independent learning is also suitable.

The goal is to use the foundations in context: explain the assumptions, carry out a calculation and interpret the result. If one of those steps feels unfamiliar, review the linked preparation first.

A preview of the learning journey

The lessons build towards these kinds of reasoning and practical work.

Describe relative value

Explain the relationship a signal assumes and how it might break.

Separate signal from common risk

Assess residual behaviour and systematic exposure.

Evaluate a strategy lifecycle

Examine out-of-sample evidence, implementation costs and reasons for retirement.

Members work through the detailed lessons, derivations, worked examples and solutions inside the learning dashboard.

Explore lesson previews by topic

Open a topic preview to see its introduction, learning objectives and prerequisites. Previous and next links let you explore the lessons in study order. Full lessons are available in the member dashboard; selected samples are free to read in full.

Topic previewFoundations of Relative Value Trading2 lessonsTopic previewPairs Trading: Distance, Cointegration, and Kalman Filter Methods6 lessonsTopic previewThe Factor-Residual Model and the S-Score5 lessonsTopic previewSignal Research and Alpha Construction4 lessonsTopic previewBacktesting and Validation6 lessonsTopic previewExecution, Costs, and Portfolio Risk Management4 lessons

Free resources to start learning

Use these alongside the programme or to prepare independently. Start with the introductory material, work through an example, then return to the research papers when the underlying ideas are familiar.

  1. Research paper · Free

    Statistical Arbitrage in the U.S. Equities Market

    Marco Avellaneda and Jeong-Hyun Lee

    Read a primary research example linking factor residuals, mean reversion and empirical strategy performance.

  2. Textbook · Free

    Introduction to Econometrics with R

    Christoph Hanck, Martin Arnold, Alexander Gerber and Martin Schmelzer

    Strengthen regression and inference before interpreting a spread model.

  3. Textbook · Free

    Forecasting: Principles and Practice

    Rob J Hyndman and George Athanasopoulos · third edition

    Review time-series diagnostics and forecast evaluation.

  4. Research paper · Free

    The Probability of Backtest Overfitting

    David H. Bailey, Jonathan M. Borwein, Marcos López de Prado and Qiji Jim Zhu

    Challenge the effects of trying many strategy variations.

  5. Data · Free

    Kenneth R. French Data Library

    Dartmouth · Tuck School of Business

    Use public factors to investigate systematic exposures.

Links reviewed 14 October 2026. Free refers to the linked reading, notes or videos; printed books and certificates may cost extra.

Find more papers and learning materials in the SelfMadeQuant Directory.

Where this programme fits

  • Systematic Trading and Quantitative Research · required programme
  • Quant Developer and Trading Systems · elective programme

Ready to study Statistical Arbitrage? Explore membership for access to the complete lessons.

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