Mean-Reversion on Equity Index Level (from the Archives)

SUMMARY

• Mean-Reversion on index level became profitable post the 1970s, before that Momentum dominated
• The structural shift from Momentum to Mean-Reversion is consistent across markets
• Likely explained by the evolution of financial markets

INTRODUCTION

Investors and traders basically only have two options when it comes to investing: speculate on Momentum or Mean-Reversion. Naturally these options can be played across different time frames, e.g. high frequency trading versus value investing, different asset classes and across or within securities. It is difficult to say which force is stronger, there is sufficient empirical research on both strategies, e.g. Value as a form of long-term Mean-Reversion and trend-following as form of Momentum. In this short research note we will analyse how these two forces played out in the short-term on equity index level across markets.

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