What Statistical Arbitrage Is (and Is Not)

A pair's gap has a training average of 0 and a standard deviation of 0.03. Today it closes at −0.06. What is its z-score, and what does it say?

• +2, so B looks expensive against A
• −2, so the gap is two standard deviations below its usual level
• −0.06, because the z-score is the gap itself

Which of these is the one thing that makes a profit "deterministic"?

• The trade uses two legs, one long and one short
• The profit is known when the trade is opened, as long as both orders fill
• The trade has a high win rate in a backtest