Oct

12

In a recent post, The State of Short Term Mean-Reversion, Marketsci blog highlights how mean reversion strategies have not been working lately:

Do I think short-term MR will stage a comeback? Yes. I think the breakdown over the last few months is tied to the strong protracted rally, but that this slow grind up will come to an end and that short-term MR will again be the play du jour once we get to the other side.

I have experienced this deterioration in my systems (all contrarian of course).

Steve Ellison is more pessimistic:

I too lean toward the contrarian side, but am increasingly wondering whether that is just an irrational behavioral bias. If markets were efficient, there would be no mean reversion except by chance. Why should there be an advantage to mean reversion? Who is the dumb money that will buy high and sell low, now that the [daily rebalancing] ETFs are gone?


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3 Comments so far

  1. adam grimes on October 12, 2009 12:26 pm

    If markets were efficient, there would be no mean reversion except by chance. 

    True, but isn't it clear that markets are not efficient, at least in the short term? And if you believe they are, there would be no biases whatsoever to be found and in fact no point in trading.

    Why should there be an advantage to mean reversion? Who is the dumb money that will buy high and sell low, now that the [daily rebalancing] ETFs are gone? 

    It has worked for a long time, before the ETFs were a big factor, and I suspect it will work again in the future.

    It's important for a trader to have several approaches. When the only tool you have is a hammer, every problem will look like a nail, right?! Be able to play mean reversion, be able to play continuation, be able to play volatility, be able to play relative performance. If you don't take the time to build these skills it's impossible to stay in the game (in a professional sense) for the long term. Otherwise trading is just a hobby and a diversion…

  2. anton johnson on October 12, 2009 2:51 pm

    We mustn’t forget that a short position reverses correlation. Also VIX, US dollar, and US T-Bonds are currently negatively correlated to most global asset classes, when measured by 21-day {ln(close today / close yesterday)}.

  3. manuel bravochico on October 12, 2009 10:03 pm

    MR has been around long before etf's, etc and I suspect it will be around after we're gone.
    I've tested simple MR trading systems on the Dow as of 1920's that are still near their all time equity equity highs.

    If MR is dead, then retail traders will be new masters of market. Buy high, sell higher.

    Possible, though I wouldn't wager on that scenario.

    @Adam
    well said.

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