Strategies · Library · Commodities
§9.6Mean reversion
Trading with pricing models
Model the log price as mean-reverting, fit it to history, compare model futures prices with market ones; buy cheap, sell rich. Beware of in-sample fits that fail out of sample.
- Asset class
- Commodities
- Held for
- Months
- Data
- Needs data ARCANE lacks
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Gap between market futures price and model price by maturity.
- Entry and exit
- Open on large gaps, close when closed.
- Sizing
- Per contract.
How it fails
- Overfit
- Model error
- Regime change
Data it needs
- futures curve across maturities
No curve data.
How ARCANE uses it
Not usable.
Needs curve and model fitting.
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, §9.6, p. 92 of the SSRN version. Described in our words. Mean reversion is ARCANE’s filing, not the book’s.