U.S. Equity Mean-Reversion Examined

Jim Liew and Ryan Roberts
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Jim Liew: Johns Hopkins Carey Business School 100 International Drive, Office 1355, Baltimore, Maryland, 21202, USA
Ryan Roberts: Johns Hopkins Carey Business School 100 International Drive, Office 1355, Baltimore, Maryland, 21202, USA

Risks, 2013, vol. 1, issue 3, 1-14

Abstract: In this paper we introduce an intra-sector dynamic trading strategy that captures mean-reversion opportunities across liquid U.S. stocks. Our strategy combines the Avellaneda and Lee methodology (AL; Quant. Financ. 2010 , 10 , 761–782) within the Black and Litterman framework (BL; J. Fixed Income, 1991 , 1 , 7–18; Financ. Anal. J. 1992 , 48 , 28–43). In particular, we incorporate the s-scores and the conditional mean returns from the Orstein and Ulhembeck ( Phys. Rev. 1930 , 36 , 823–841) process into BL. We find that our combined strategy ALBL has generated a 45% increase in Sharpe Ratio when compared to the uncombined AL strategy over the period from January 2, 2001 to May 27, 2010. These new indices, built to capture dynamic trading strategies, will definitely be an interesting addition to the growing hedge fund index offerings. This paper introduces our first “focused-core” strategy, namely, U.S. Equity Mean-Reversion.

Keywords: Black–Litterman; US stocks; dynamic trading strategy; mean-reversion; quantitative finance; statistical arbitrage (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2013
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