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High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems by Irene Aldridge

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Chapter 12. Event Arbitrage

With news reported instantly and trades placed on a tick-by-tick basis, high-frequency strategies are now ideally positioned to profit from the impact of announcements on markets. These high-frequency strategies, which trade on the market movements surrounding news announcements, are collectively referred to as event arbitrage. This chapter investigates the mechanics of event arbitrage in the following order:

  • Overview of the development process

  • Generating a price forecast through statistical modeling of

    • Directional forecasts

    • Point forecasts

  • Applying event arbitrage to corporate announcements, industry news, and macroeconomic news

  • Documented effects of events on foreign exchange, equities, fixed income, futures, emerging economies, commodities, and REIT markets

DEVELOPING EVENT ARBITRAGE TRADING STRATEGIES

Event arbitrage refers to the group of trading strategies that place trades on the basis of the markets' reaction to events. The events may be economic or industry-specific occurrences that consistently affect the securities of interest time and time again. For example, unexpected increases in the Fed MFunds rates consistently raise the value of the U.S. dollar, simultaneously raising the rate for USD/CAD and lowering the rate for AUD/USD. The announcements of the U.S. Fed Funds decisions, therefore, are events that can be consistently and profitably arbitraged.

The goal of event arbitrage strategies is to identify portfolios that make positive profit over the ...

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