RT Journal Article SR Electronic T1 Stress Testing Arbitrage Strategies JF The Journal of Investing FD Institutional Investor Journals SP 45 OP 51 DO 10.3905/JOI.2010.19.1.045 VO 19 IS 1 A1 Ellen Rachlin A1 Maria Castro YR 2010 UL https://pm-research.com/content/19/1/45.abstract AB If risk for relative value arbitrage strategies is measured by traditional parallel stress tests, potential losses are obscured. Highly leveraged relative value strategies that rely on mean reversion for profitability are most susceptible to surprising losses. These losses are not well measured by the usual stress risk measurement means. The greater the leverage deployed to capture minor deviations from the norm, the greater the potential for these unanticipated losses. Even arbitrage strategies that seek a natural and necessary convergence between fungible or deliverable instruments can be subject to surprising mark-to-market changes along the path to convergence.TOPICS: Risk management, portfolio management/multi-asset allocation, exchanges/markets/clearinghouses