Friday, March 13, 2009

Mean-reversion is getting stronger

As I mentioned in various previous blog posts, (e.g. see here), I believe mean-reversion strategies have been performing very well in the last year. Now here is an article (hat tip: Laurence) that provides concrete analysis to support this hypothesis. In fact, the author points out that most of the mean-reversion in recent years comes from the overnight close-to-open reversal.
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15 comments:

  1. AnonymousSaturday, March 14, 2009 at 7:34:00 AM EDT

    Dear Ernest,

    I have your book and tried to login at epchan.com/book/sp500_20071121.xls but it failed. I used the correct password and login... Is it not available anymore?

    Newton.

    ReplyDelete
  2. MeSaturday, March 14, 2009 at 7:25:00 PM EDT

    I posted a review of your book here http://blog.traderwerks.com/2009/03/01/quantitative-trading-el-book-review/

    You may want to take a look.

    ReplyDelete
  3. Ernie ChanSunday, March 15, 2009 at 10:48:00 AM EDT

    Thanks, Trader, for the review!

    Newton: the file is still available, but you need to select "Excel" as the application to open it when you click on the link.

    ReplyDelete
  4. AnonymousMonday, March 16, 2009 at 6:28:00 AM EDT

    Ernest,

    Here is the message that appears:


    Error 404 Page Not Found

    Sorry - Error 404 | Page Not Found

    ReplyDelete
  5. Ernie ChanMonday, March 16, 2009 at 7:04:00 AM EDT

    Newton,
    sp should be SP in the file name.
    Ernie

    ReplyDelete
  6. AnonymousTuesday, March 17, 2009 at 3:49:00 PM EDT

    Ok, Thanks!

    It works now.

    ReplyDelete
  7. AnonymousWednesday, April 8, 2009 at 4:41:00 PM EDT

    I trade mean reversion in the direction of the drift. This strategy has worked very well for me but this year has been an absolute blow out in terms of performance. We close our year next week and so far we are up 48%. It has been a long time since things have worked so well.

    Proxy based spread strategies are also working phenomenally and are adding a lot of stability to the portfolio.

    ReplyDelete
  8. Ernie ChanThursday, April 9, 2009 at 12:00:00 PM EDT

    Anonymous,
    Congrats to your great performance and thanks for sharing your results with us!

    By "trading mean-reversion with a drift" do you mean you have an expected value of the drift? Do you compute that drift based on a technical or fundamental model?
    Ernie

    ReplyDelete
  9. AnonymousThursday, April 9, 2009 at 4:26:00 PM EDT

    Ernie,

    Can't really share our indicator or its construct but I can say that we trade mean reversion taking trend into consideration. The trend has obviously been down in the S&P500 over for the last few months and we have only been taking mean reverting trades to the downside (ie, selling rallies - although the AI and NN algorithms are more complex than that).

    S -

    ReplyDelete
  10. JohnThursday, April 16, 2009 at 9:36:00 AM EDT

    I liked your book, but it is very annoying that the premium section of your website (http://epchan.com/book/) does not allow directory listings (it gives a 403 error). There is also no index file, despite what you say on http://www.epchan.com/subscription/spread.htm. So there is no way to know what files there are other than trying all the filenames mentioned in your book (some of which are case sensitive, others not). This also means that if you post a new file, we will never be able to find it.

    ReplyDelete
  11. The FixerSunday, November 1, 2009 at 11:29:00 AM EST

    HI Ernie,

    Was looking for mean reversion trading over the longer term and came across your post.
    Your post is relevant for reverting to the last trading days avg. price. But what about mean reversion over the longer time period ? For example reversion to the 200 DMA after being say +40% above the 200 DMA.
    Need your views on this.
    I have done a backtesting study on this on Indian NSE INDIA NIFTY index for the last 18 years. And based on that predicted a 15% fall in NIFTY by this month Nov`09 end. In fact I believe that most global markets have the above similar pattern. see details at my blog http://saanpaurseedi.blogspot.com

    Cheers
    ~ The Fixer

    ReplyDelete
  12. Ernie ChanMonday, November 2, 2009 at 9:12:00 PM EST

    Fixer,
    Sure, there are mean-reversion at all different time frames. I focus on the short-term because short-term strategies have higher Sharpe ratio.
    Ernie

    ReplyDelete
  13. AnonymousFriday, November 27, 2009 at 2:32:00 PM EST

    Hey just did exercise 3.4 in book IGE
    & got a sharpe ratio -.334220267
    as opposed the proposed .789317538 in your book. What did I do wrong?

    ReplyDelete
  14. FelixWednesday, March 14, 2018 at 12:55:00 PM EDT

    Hello Ernest!
    I have a short question regarding your mean reversion calculations:
    In Example 2.4 of Algorithmic Trading, you regress deltaY on ylag.
    In Example 7.5 of Quantitative Trading, it is dz on prevz-mean(prevz).
    Can you explain the difference why in one case the mean is used and in the other it is not?
    Thanks!
    Felix

    ReplyDelete
  15. Ernie ChanWednesday, March 14, 2018 at 1:32:00 PM EDT

    Hi Felix,
    The regression coefficient (slope) is actually unaffected whether you add the mean as an offset. In both cases, the offset is non-zero, and is itself a result of the regression fit. Adding the mean only affects the fitted offset, not the slope
    Best,
    Ernie

    ReplyDelete