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Questions tagged [mean-reversion]

A mean reverting process is a process that, over time, tends to drift toward its long-term mean.

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How to estimate parameters for 2 correlated Ornstein-Uhlenbeck processes with maximum likelihood?

I would like to use maximum likelihood to estimate the parameters of two correlated Ornstein-Uhlenbeck processes from empirical data. Do you have any good references for this? If you have any hints ...
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When constructing a cointegrating series, does choosing the linear regression with the lowest ADF test statistic yield the optimal hedging ratio?

Multiple sources say that you should find the optimal hedging ratio between two stocks in a pairs trade by conducting 2 linear regressions (with each stock as the independent variable), and using ...
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Expanding window vs Rolling window z-score

I wish to find the z-score of a value measure( e/g P/E ratio) to compare them across asset classes, currently i am using an expanding window z-score to calculate the long-term mean and standard ...
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Does your Parkinson volatility ratio work as Taleb explained?

According to Dynamic Hedging: Managing Vanilla and Exotic Options (Taleb, 1997), the Parkison volatility estimator has several meaningful properties. It is defined $$P=\sqrt{\frac{1}{n}\sum_{i=1}^{n}\...
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What is the probability of ruin of a Geometric Ornstein-Uhlenbeck process?

I would like to calculate the probability of ruin (or, default), i.e. $$\text{Pr}(\tau<T),$$ where $\tau$ is the default time and $X_t$ follows the Geometric Ornstein-Uhlenbeck (O-U) process $$...
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How to trade the Ornstein-Uhlenbeck process?

My question comes from this paper, which is a short version of Avellaneda's paper The picture bellow provides a summary of the equations. Do I understand correctly that in order to trade OU process ...
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Position sizing for a mean reversion strategy

I have a model that returns z scores for a mean reversion strategy where z score is the current price minus average and divided by vol. At the moment, positions are sized inverse linear to the z ...
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What is a stochastic processes which reasonably captures commodity price dynamics?

I ran into a stumbling block earlier when I tried to price stochastic annuities (see Asian options). This is actually technically an acturial problem, but is well adapted to the techniques of quant ...
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Frequency Arbitrage

We know that the volatility is lower when the sampling period is longer, for example $\sigma_{7days} < \sigma_{1day}$, Then I came across this strategy that I cannot quite understand how to exploit ...
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Is there a difference between “regression toward the mean” vs “mean reversion”, in the context of financial time series and cash flow analysis?

I read the Wikipedia articles, and it implied that it was different: https://en.wikipedia.org/wiki/Regression_toward_the_mean In finance, the term mean reversion has a different meaning. Jeremy ...
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cointegration strategy

If it can be proved that two time series $$S_t^1=\alpha + \beta S_t^2 + \xi_t$$ representing stocks are correlated, with $\beta=-2$ and then are proved to be cointegrated, how a portfolio should be ...
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How to optimize an arbitrage portfolio when taking into account different speeds of mean reversion?

In portfolio optimization, it is insufficient to just note the size of price deviation - that only tells the amount of profit if held to maturity. One also needs to take into account reversion speed - ...
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Are there alternatives to the Box-Tiao decomposition in identifying mean reverting portfolios?

As documented in this paper, Box-Tiao decomposition (a way to decompose multiple time series into components with different speeds of mean reversion) can be used to identify mean reverting portfolios. ...
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Mean Reverting Spread

I have constructed a mean reverting spread using two indexes. I know they have to be mean reverting, but when plotted side by side they are mean reverting for a little bit and then deviate and head ...
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Reference on Futures basis trading strategy

I have heard that it is possible to trade on the futures basis. In my understanding, the futures basis is essentially the difference between the futures price and the underlying asset (also referred ...
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Stochastic process with determinstic frequency of regime changes

Suppose that I have an OU process. For instance, assume that I want to model the interest rates. Suppose that regime change is known ex ante, and is deterministic in terms of frequency (For instance, ...
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Cointegration between daily time series and intraday time series

I am working with time series data of daily prices, and intraday prices. For simplicity sake I will refer to the daily time series as 'A' and 'B', and the intraday time series of the same instruments ...
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What does it mean that $\Phi$ is a mean-reversion factor?

Let $f$ be a variable which evolves according to the above. What does it mean to say that $\Phi$ is a mean-reversion factor? I mean, I guess it means $f_{t+1} = (1-\Phi)f_t + \epsilon_{t+1}$ and so ...
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How to calculate mean reversion values for Hull White tree calibration on MATLAB?

As part of a time series analysis, I'm writing a MATLAB program to create a Hull White tree, for the purpose of pricing a coupon-bearing bond. While using the function hwvolspec (volatility ...
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Quantitative Business Cycle Investing

Is there a major article or even better a comprehensive recent review article showing quantitative evidence for the existence of the business cycle and measuring the trending and mean reversion on ...
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Exact value of mean reversion rate knowing terminal value of the process

Let you have the following mean reverting process: $\text{d}x_{t}=a(\theta-x_{t})\text{d}t$, where the diffusion term is absent, that is this process is not stochastic. Let you know the value of $\...