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Modeling Momentum and Reversals

Author

Listed:
  • Harvey J. Stein

    (Labs Group, Two Sigma, New York, NY 10013, USA
    Department of Mathematics, Columbia University, New York, NY 10027, USA)

  • Jacob Pozharny

    (Bridgeway Capital Management, Houston, Texas 77046, USA)

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.

Suggested Citation

  • Harvey J. Stein & Jacob Pozharny, 2022. "Modeling Momentum and Reversals," Risks, MDPI, vol. 10(10), pages 1-10, October.
    • Handle: RePEc:gam:jrisks:v:10:y:2022:i:10:p:190-:d:931809
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    References listed on IDEAS

    as
    1. repec:bla:jfinan:v:53:y:1998:i:6:p:1839-1885 is not listed on IDEAS
    2. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    3. Charles-Olivier Amédée-Manesme & Fabrice Barthélémy & Philippe Bertrand & Jean-Luc Prigent, 2019. "Mixed-asset portfolio allocation under mean-reverting asset returns," Annals of Operations Research, Springer, vol. 281(1), pages 65-98, October.
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    Citations

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    Cited by:

    1. Giner, Javier & Zakamulin, Valeriy, 2023. "A regime-switching model of stock returns with momentum and mean reversion," Economic Modelling, Elsevier, vol. 122(C).

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