Mean reversion
Practical stochastic modeling of electricity prices
We develop a flexible multifactor stochastic model with three diffusive and three spike regimes, for daily spot and forward electricity. The model captures various stylized features of power prices, including...
This paper discusses the implications of mean reversion in stock prices for long-term investors such as pension funds. We consider a mean-variance-efficient investor and show how mean reversion in stock...
Arthur M. Berd BERD LLC Welcome to the winter 2012/13 issue of The Journal of Investment Strategies. This issue opens the second volume and the second year of our publication. This milestone comes at...
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More Mean reversion articles
Market reaction to price changes and fat-tailed returns
Jorge Sobehart departs from the idealised concept of rational investors, introducing a simple behavioural model of market reaction to price trends that produces fat-tailed distributions of asset returns in close agreement with historical data
Analysing common processes used to model energy prices
Choosing the appropriate process for modelling energy prices is essential for best calculating value, risk and hedging metrics for energy derivatives and assets. In this first article of a six-part series, Carlos Blanco and Michael Pierce discuss some...
Cutting edge: Valuation of spread commodity structures
In this paper, Dan Mahoney and Krzysztof Wolyniec show that in co-integrated (mean-reverting) futures markets, active dynamic hedging is required to realise the quadratic variation of the underlying spread process. Using static hedges/portfolios yields...
Cutting edge – multi-scale volatility in commodity markets
This paper deals with volatility estimation in commodity markets. Piotr Grzywacz and Krzysztof Wolyniec note that energy commodities have many time (volatility) scales, which has dramatic implications for mean-reversion and volatility estimation. They...
Mean reversion pays, but costs
A mean-reverting financial instrument is optimally traded by buying it when it is sufficiently below the estimated ‘mean level’ and selling it when it is above. In the presence of linear transaction costs, a large amount of value is paid away crossing...
Cross-asset correlations pose opportunities - and threats
Correlation between asset classes has remained at high levels this year, despite a fall in volatility. This presents a potential opportunity for traders, but could also pose significant risks. By Christopher Whittall
Option pricing for power prices with spikes
European power prices are very volatile and subject to spikes, particularly in German and Dutch markets. Ronald Huisman and Cyriel de Jong examine the impact of spikes on option prices by comparing prices from a standard mean-reverting model and a regime...
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