

Show HN: Statistical Arbitrage on Stocks Explained - CaptainKanuk
https://www.quantopian.com/posts/how-to-build-a-pairs-trading-strategy-on-quantopian

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minimaxir
Pairs trading/hedging is not "arbitrage." It's a risk-mitigating strategy.

An arbitrage strategy would be a strategy that would be _guaranteed_ to make
money. (And would probably not be shown on a blog post)

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Rainymood
Indeed, arbitrage means _guaranteed_ money, usually by exploiting different
prices in different markets.

Imagine $AAPL trades for 100 at market 1 and for 95 at market 2. This is an
arbitrage opportunity. Buy for 95 at market 2, sell for 100 at market 1. This
is a gauranteed profit of 5. Obviously this would drive the price down in
market 1 (excess supply) and up in market 2 (excess demand), which would
balance these 2 out eventually.

Here is an old joke about this:

Two economists walk on the road and find a $100 bill in the road. Economist 1
asks whether he should go for it. Economist 2 replies that such an opportunity
cannot exist as someone else would have already taken the bill. That means
either the bill is there to test some one (candid camera, honeytrap by cops,
etc) or the owner would be back shortly. In either case, the $100 is not a
risk-free opportunity.

