Mean Reversion Based on Autocorrelation: A Comparison Using the S&P 100 Constituent Stocks and the 100 Most Liquid ETFs

ETF Risk, 2013, October, 36-41

24 Pages Posted: 1 Jun 2013 Last revised: 27 Nov 2014

See all articles by Christian Dunis

Christian Dunis

John Moores University - Business School

Jason Laws

University of Liverpool - Accounting and Finance Division

Jozef Rudy

Harvest Alpha Capital

Date Written: January 31, 2011

Abstract

The motivation for this paper is to show that even a simple strategy based on conditional autocorrelation can give traders an edge.

Our simple mean reversion strategy takes the position in a pair consisting of Exchange traded funds (ETFs) or shares based on the normalized previous period's return and the actual conditional autocorrelation.

We conclude that ETFs are more suitable financial instrument for our strategy than stocks.

Yet, another finding is that the strategy is significantly improved when we use half-daily (open-close-open-...) sampling frequency as opposed to the daily one (close-close). Information ratios after accounting for transaction costs (TC) range between 1.4 and 2.8 for ETF pairs at half-daily sampling frequency.

Keywords: Mean reversion, ETFs, pairs trading, autocorrelation

JEL Classification: C00, C10, C50, G00, G11

Suggested Citation

Dunis, Christian and Laws, Jason and Rudy, Jozef, Mean Reversion Based on Autocorrelation: A Comparison Using the S&P 100 Constituent Stocks and the 100 Most Liquid ETFs (January 31, 2011). ETF Risk, 2013, October, 36-41 . Available at SSRN: https://ssrn.com/abstract=2272794 or http://dx.doi.org/10.2139/ssrn.2272794

Christian Dunis

John Moores University - Business School ( email )

John Foster Building
98 Mount Pleasant
Liverpool, L3 5UZ
United Kingdom

Jason Laws

University of Liverpool - Accounting and Finance Division ( email )

United Kingdom

Jozef Rudy (Contact Author)

Harvest Alpha Capital ( email )

Bratislava
Slovakia

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