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...

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Bibliographic Details
Published in:Risks (Basel) 2022-10, Vol.10 (10), p.190
Main Authors: Stein, Harvey J., Pozharny, Jacob
Format: Article
Language:English
Subjects:
Arbitrage
Average
Behavior
Brownian motion
Business cycles
Commodity options
Efficiency
Efficient markets
Growth rate
investment strategies
Investor behavior
market efficiency
mean reversion
momentum
no arbitrage
Prices and rates
reversals
Stock prices
Stocks
Volatility
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Summary: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.
ISSN:2227-9091
2227-9091
DOI:10.3390/risks10100190