Mean Reversion And The S&P 500 by Stephen Beatson
Rhythm Of The Markets
It is generally believed that markets tend to mean-revert. But this is true for some markets more than others. Here’s an in-depth look at how the S&P 500 responds to mean reversion.
Mean reversion is not a universal phenomenon; some markets have a tendency toward mean reversion, while others don’t. This has led a number of analysts and traders to look upon mean reversion with some degree of suspicion. If mean reversion has a solid statistical foundation, should it not be applicable to all markets all the time?
The simple truth is that some markets respond well to mean-reversion strategies, and others don’t. There are several possible explanations for this, including what factors drive the instrument’s price (macro economics, earnings, news, and so on); the number of market participants; the ability to take short positions; the volumes involved; and the average volatility of the instrument in question...