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Tuesday, January 1, 2013

Intraday mean reversion

In my previous post I came to a conclusion that close-to-close pairs trading is not as profitable today as it used to be before 2010. A reader pointed out that it could be that mean-reverting nature of spreads just shifted towards shorter timescales. I happen to share the same idea, so I decided to test this hypothesis.

This time only one pair is tested: 100$ SPY vs -80$ IWM. Backtest is performed on 30-second bar data from 11.2011 to 12.2012.
The rules are simple and similar to strategy I tested in the last post:
if bar return of the pair exceeds  1 on z-score, trade the next bar.
The result looks very pretty:

I would consider this to be enough proof that there is still plenty of mean-reversion on 30-second scale.
If you think that this chart is too good to be true, that is unfortunately indeed the case. No transaction costs or bid-ask spread were taken into account. In fact, I would doubt that there would be any profit left after subtracting all trading costs.
Still, this kind of charts is the carrot dangling in front of my nose, keeping me going...