Refers to a strategy which trades the release of fundamental data, whether macroeconomic, related to a specific security or commodity. The term “arbitrage” is carried over and not be confused with event arbitrage surrounding mergers or other transactions among individual securities.
Event arbitrage strategies are well-documented and have been in use for many years, across most markets. They employ a wide range of conditions for trade entry an exit. The most documented strategies use time as a primary factor to identify point forecasts following the initial spike itself, in an attempt to fade the initial movement. Directional methodologies may also be used. Other forms of analysis include sine wave identification and other volatility-based measures. Regressions have been used to measure the magnitude of movements, thus locating an appropriate point of exit.
Historical releases are measured based on any or all of the following sample factors, and at varying frequencies:
- Average initial movement
- Forecast consensus vs. actual release
- Specific times of inflection for a reversion following the initial “spike” (measured from minutes to milliseconds)
- Positive vs. negative impact (studies show negative data produces larger reactions)
Less sophisticated event arbitrage strategies are referred by retail traders as “spike trading”, the majority of which focus solely on the initial price reaction.
Exchange Rate and Fundamentals: New Evidence from Real-Time Data: ECB Working Paper Series No. 365 May 2004: https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp365.pdf?f02f3918743a1bba2761b5118f3345f8
The Effects of Macroeconomic News on High Frequency Exchange Rate Behavior (Almeida, Goodhart, Payne, 1998): http://econpapers.repec.org/article/cupjfinqa/v_3a33_3ay_3a1998_3ai_3a03_3ap_3a383-408_5f00.htm