Modeling Momentum and Reversals

Harvey J. Stein () and Jacob Pozharny
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Harvey J. Stein: Labs Group, Two Sigma, New York, NY 10013, USA
Jacob Pozharny: Bridgeway Capital Management, Houston, Texas 77046, USA

Risks, 2022, vol. 10, issue 10, 1-10

Abstract: Stock prices are well known to exhibit behaviors that are difficult to model mathematically. Individual stocks are observed to exhibit short term price reversals and long term momentum, while their industries only exhibit momentum. Here we show that individual stocks can be modeled by simple mean reverting processes in such a way that these behaviors are captured, the model is arbitrage free, and market informational efficiency is preserved. Simulation shows that in such a market, when mean reversion is sufficiently high, strategies which use reversals would substantially outperform buy and hold strategies.

Keywords: reversals; momentum; mean reversion; market efficiency; investment strategies; no arbitrage (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:gam:jrisks:v:10:y:2022:i:10:p:190-:d:931809

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