Introduction

Tim Leung and Xin Li

Chapter 1 in Optimal Mean Reversion Trading:Mathematical Analysis and Practical Applications, 2016, pp 1-10 from World Scientific Publishing Co. Pte. Ltd.

Abstract: In the financial markets, it has been widely observed that many asset prices exhibit mean reversion, including commodities, foreign exchange rates, volatility indices, as well as US and global equities. Mean-reverting processes are also used to model the dynamics of bond prices, interest rate, and default risk. In order to visualize a mean-reverting price path, we illustrate in Figure 1.1(a) the historical prices of an exchange-traded fund (ETF), the Vanguard Short-Term Bond ETF (BSV), from June 12, 2014 to June 11, 2015. This ETF is designed to track bond prices with short maturities, and is traded liquidly on NYSE and other exchanges. As another example, Figure 1.1(b) shows the time series of CBOE Volatility Index (VIX) from June 12, 2014 to June 11, 2015. Although the volatility index is not traded, investors can gain exposure to it by trading futures, options, or exchange-traded notes (ETNs) designed to track the index…

Keywords: Trading Strategies; Mean Reversion; Optimal Stopping; Optimal Switching; Stop-Loss; Stochastic Processes; Exchange-Traded Funds (ETFS); Ornstein–Uhlenbeck Model; Cox-Ingersoll-Ross (CIR) Model (search for similar items in EconPapers)
Date: 2016
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