Strategies · Library · Stocks
§3.9Mean reversion
Mean-reversion – single cluster
Take a group of stocks that move together, such as one industry. Short those that rose more than the group average and buy those that fell more, sizing each bet by how far it sits from the average, expecting the group to pull back together.
Open in the builderAs a long-only proxy; see how ARCANE uses it.
- Asset class
- Stocks
- Held for
- Days
- Data
- ARCANE has the data
- Symphony
- Builds as a long-only proxy
The rule
- Signal
- Each stock's return over a window minus the group's average return.
- Entry and exit
- Rebalance often (daily to weekly); positions shrink as gaps close.
- Sizing
- Dollar position proportional to the negative of the stock's distance from the group mean; longs and shorts net to zero.
How it fails
- Industry news can be a real shift, not noise
- Short leg needed
- High turnover
- Group must be well chosen
Data it needs
- daily prices
Daily closes for stocks and sector peers are available.
How ARCANE uses it
A Call that a stock catches up with its sector peers could cite its gap to the sector average.
Builds as a long-only proxy. Hold the laggards of a small sector basket (bottom N by recent return) in equal weight; shorts and proportional sizing are dropped.
Filed under the mean reversion card
Buy last week’s biggest losers and sell last week’s biggest winners, betting that short, sharp moves partly undo themselves.
A paper plan from this card holds 1 to 10 days, stops at 1× the expected move and uses at most 50% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §3.9, p. 47 of the SSRN version. Described in our words. Mean reversion is ARCANE’s filing, not the book’s.