Markov and the Mean Reversion Framework
Posted: 26 May 2015 Last revised: 27 Jun 2017
Date Written: May 24, 2015
Natural systems witness reversion and divergence simultaneously across different periods of time. This paper tests the performance proxy as mentioned in a previous paper on the ‘Mean Reversion Framework’ for Markov’s transition probabilities. The framework exhibits a stable pattern when tested for STOXX 50, S&P 100, Nikkei 225 and FTSE 100 components across different periods of time from 20 days to 3750 days. The three bin classifications of the framework; value, growth and core exhibit a consistency in growth and decay pattern. Both value and growth exhibit persistence compared to the core bin and tends to decay slowly. While the core bins show a symmetric decay across other bins. Such a probabilistic behavior in group components leads the author to believe that the mean reversion framework is indeed converging and diverging leading to a robust expression of a stock market system. The framework could work across data sets from various domains, confirming the proposed universality of the mean reversion framework.
Keywords: Mean Reversion Framework, Probability, Markov Transition
JEL Classification: A10
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