Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/103603
Authors: 
Liew, Jim
Roberts, Ryan
Year of Publication: 
2013
Citation: 
[Journal:] Risks [ISSN:] 2227-9091 [Publisher:] MDPI [Place:] Basel [Volume:] 1 [Year:] 2013 [Issue:] 3 [Pages:] 162-175
Abstract: 
In this paper we introduce an intra-sector dynamic trading strategy that captures mean-reversion opportunities across liquid U.S. stocks. Our strategy combines the Avellaneda and Lee methodology (AL; Quant. Financ. 2010, 10, 761-782) within the Black and Litterman framework (BL; J. Fixed Income, 1991, 1, 7-18; Financ. Anal. J. 1992, 48, 28-43). In particular, we incorporate the s-scores and the conditional mean returns from the Orstein and Ulhembeck (Phys. Rev. 1930, 36, 823-841) process into BL. We find that our combined strategy ALBL has generated a 45% increase in Sharpe Ratio when compared to the uncombined AL strategy over the period from January 2, 2001 to May 27, 2010. These new indices, built to capture dynamic trading strategies, will definitely be an interesting addition to the growing hedge fund index offerings. This paper introduces our first "focused-core" strategy, namely, U.S. Equity Mean-Reversion.
Subjects: 
Black-Litterman
US stocks
dynamic trading strategy
mean-reversion
quantitative finance
statistical arbitrage
Persistent Identifier of the first edition: 
Creative Commons License: 
http://creativecommons.org/licenses/by/3.0/
Document Type: 
Article
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