Abstract
In this research note we investigate whether short-horizon, statistical arbitrage style alpha factors perform differently in different environments. In particular it is often said that stat arb strategies are “long vol” in the sense that they profit when market level volatility measures are higher than average. We find that reversal strategies perform best in high-volatility environments, but that both reversal and other short-horizon technical trading strategies perform best when the opportunity set – as measured by the cross-sectional variance of returns – is highest.The opportunity set measure better distinguishes a priori between low- and high-performing periods for reversal, does so for the three other subcomponents of ExtractAlpha’s Tactical Model (TM1), and is a more stable measure than the VIX. Current opportunity set measures favor stat arb strategies.
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