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Is mean reversion dead – reader suggested research – Alvarez Quant Trading 08.10.

2018, 00(29

Is mean reversion dead –


reader suggested research
October 24, 2013

My article on “Is mean-reversion dead?” produced lots of suggestions from


readers on other tests to try. We will jump right in and look at what these
research suggestions produced.

Test Rules
Testing Universe: Top 1,000 stocks by dollar-volume with closing price
greater than $1. No ETFs included.

Date Range: 1/1/2001 to 8/30/2013

Entry:

RSI(2) < 5
Entry on Close

Exit:

RSI2 > 70
Exit on Close

VIX Ranges
Rob D. suggested looking at the oversold stock performance in different
VIX bands. From 2001 to 2013, the daily VIX values are divided into five
equal sized buckets. From this, we have five ranges to compare against to
for our test of entering a stock when RSI2 < 5 and exiting when RSI2 > 70.

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Is mean reversion dead – reader suggested research – Alvarez Quant Trading 08.10.2018, 00(29

Good mean reversion returns tend to happen when the VIX is greater than
26.9. Now we will look at the VIX over the years and the average %p/l of
oversold stocks.

Weak correlation exists to higher VIX leading to higher returns but it is not
very strong. I don’t see the VIX being a strong predictor to mean reversion
returns.

Hold Periods
Steven G. suggestion was to look at the average hold period of the oversold
stocks over the years. His theory being that holds are getting longer, which
was my theory too.

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Is mean reversion dead – reader suggested research – Alvarez Quant Trading 08.10.2018, 00(29

As we can see from the trend line, it is getting shorter. Are holds getting
shorter because more people are trading mean reversion?

Big Winners and Losers


From another reader, he wanted to know if the number of big winners and
losers are declining over the years. I defined big winners as a trade that
made more than 10%. A big loser is a trade that lost more than 10%. An
intriguing idea.

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Is mean reversion dead – reader suggested research – Alvarez Quant Trading 08.10.2018, 00(29

The trend is down for both big winners and big losers. This year, 2013, is
on track to have the least big winners and losers since 2001. Steve and I
have been commenting that we have seem to be getting less big winners
and now it is confirmed by the numbers.

Spreadsheet of Results
If you’re interested in a spreadsheet of my testing results, enter your
information below, and I will send you a link to the spreadsheet. The
spreadsheet contains the tables used to generate the charts and some
additional information not in the post.

Backtesting platform used: AmiBroker. Data provider:Norgate Data


(referral link)

Comments
One suggestion, that I did not get to today, was to look at only when stocks
are above the 200 day moving average. This idea will be a future post. Keep
your comments and testing ideas coming.

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