Statistical Arbitrage

Statistical Arbitrage or Stat Arb is a trading strategy based on the statistical mispricing of one or more assets compared to the expected future value of the assets. Stat Arb algorithms monitor financial instruments that are historically known to be statistically correlated or cointegrated, and any deviations in the relationship indicate trading opportunities. Stat Arb involves statistics, quantitative methods and a computational approach for data mining which can be traded algorithmically at high frequency.  Statistical Arbitrage includes different types of strategies such as pairs trading, index arbitrage, basket trading or delta neutral strategies. These strategies vary depending on number, types, and weights of instruments in a portfolio and its risk taking capacity.

Example:

One of the most popular examples of Stat Arb is Pepsi vs Coca-Cola stocks. Both stocks belong to the same sector, or type of business, and move in tandem as same market events affect their prices. Any deviations in the movement of prices in this pair, for instance,  if Pepsi stock rises considerably compared to that of the Coca-Cola, then one might short the Pepsi stock and long the  Coca-Cola stock in an anticipation to book profit.