Is mean reversion - on any time frame, completely useless in 2020?
I have not been able to show mean reversion working over the past 2-3 years. Have you?
Charles,
I do not think this is off topic. My small-cap value strategy has mean-reverted in a big way and this probably could have been used–at least as a hedge–if I shorted in my SEP-IRA.
Edit Had to check. The definition of mean-reversion is not limited to prices as per Investopedia and not limited to negative prices becoming positive: “A reversion to the mean involves retracing any condition back to a previous state.”
It does remain a legitimate question as the whether small-cap value will do well again but I do not see how I could argure that there is no mean-reversion.
Perhaps, people have a particular trading strategy in mind.
Best,
Jim
Yes. Below is the performance of Pr4W%Chg with lower values better in the S&P 500 from February 1, 2018 to February 1, 2020.
In the last few weeks, with the massive sell-off, mean reversion is not going to work. When there’s a massive sell-off, a) stop orders get filled; b) investors sell their losing positions, mostly because they ignore mean reversion and just want to sell whatever hasn’t been working lately; c) margins get called, which affects investors with lots of losing positions more than investors with few of them. Practically all of the things that work well in the late stages of a bear market and the early stages of a bull market–mean reversion, value, small minus big–fail during a sell-off.
