Selasa, 09 Desember 2008

The enduring profitability of mean-reversion strategies

Some readers have doubts about my assertion that mean-reversal models continue to be very profitable during this whole year of financial and economic disasters. So I backtested the mean-reversion strategy in Example 3.8 of my book with the most recent one-year SP1500 data. Without transaction cost, the Sharpe ratio is 4.8. Even after subtracting 10 b.p. round-trip transaction cost, it is still at 3.5.

Since the strategy was constructed over a year ago while I was writing the book, this most recent backtest is done on unseen data, with absolutely no look-ahead bias!

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