Copulas - A Powerful Tool in Statistical Arbitrage

Copulas enable us to formulate a deep understanding of the true dependency between financial assets - in normal, booming and plummeting markets. We can gain insight into how the specific dependency between assets change in such times and thus also gauge their conditional probability in reaching their respective price or returns deviations from the mean.

In doing so, we open a new door towards statistical arbitrage, whereby the use of Copulas is very different to our usual analysis using cointegration. Regardless, we are still modelling dependency between assets, just from another angle.

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