Modeling Momentum and Reversals
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 re...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
| Published: |
MDPI AG
2022-10-01
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| Series: | Risks |
| Subjects: | |
| Online Access: | https://www.mdpi.com/2227-9091/10/10/190 |
| _version_ | 1797470003328450560 |
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| author | Harvey J. Stein Jacob Pozharny |
| author_facet | Harvey J. Stein Jacob Pozharny |
| author_sort | Harvey J. Stein |
| collection | DOAJ |
| description | 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. |
| first_indexed | 2024-03-09T19:31:34Z |
| format | Article |
| id | doaj.art-473ebb39f1344f81856b7dc91cbc3e99 |
| institution | Directory Open Access Journal |
| issn | 2227-9091 |
| language | English |
| last_indexed | 2024-03-09T19:31:34Z |
| publishDate | 2022-10-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Risks |
| spelling | doaj.art-473ebb39f1344f81856b7dc91cbc3e992023-11-24T02:23:08ZengMDPI AGRisks2227-90912022-10-01101019010.3390/risks10100190Modeling Momentum and ReversalsHarvey J. Stein0Jacob Pozharny1Labs Group, Two Sigma, New York, NY 10013, USABridgeway Capital Management, Houston, Texas 77046, USAStock 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.https://www.mdpi.com/2227-9091/10/10/190reversalsmomentummean reversionmarket efficiencyinvestment strategiesno arbitrage |
| spellingShingle | Harvey J. Stein Jacob Pozharny Modeling Momentum and Reversals Risks reversals momentum mean reversion market efficiency investment strategies no arbitrage |
| title | Modeling Momentum and Reversals |
| title_full | Modeling Momentum and Reversals |
| title_fullStr | Modeling Momentum and Reversals |
| title_full_unstemmed | Modeling Momentum and Reversals |
| title_short | Modeling Momentum and Reversals |
| title_sort | modeling momentum and reversals |
| topic | reversals momentum mean reversion market efficiency investment strategies no arbitrage |
| url | https://www.mdpi.com/2227-9091/10/10/190 |
| work_keys_str_mv | AT harveyjstein modelingmomentumandreversals AT jacobpozharny modelingmomentumandreversals |