Change of character

Question: What’s one way you could have nearly doubled your money since last September with minimal drawdown?

Answer: XIV daily mean reversion! Well, a long only approach that is.

Daily mean reversion just means holding XIV if it declined in price the previous day.  Daily follow through would be holding XIV if it increased in price the previous day.

Daily mean reversion was hardly a good strategy in recent years.  In fact, since 2009 when VXX came into existence, this strategy performed relatively poorly while a daily follow through strategy did fantastic. That changed last September.  I have no clue why.

Check out the chart below illustrating the recent performance of the two series.


One note, if one looks at simulated XIV before 2009 you can see this isn’t the only time mean reversion would have dominated.  The same thing would have happened in 2007/2008.  Is there anything to be read into that? Possibly not.  Could just be random changes in the market.

There’s no telling how transitory this change will be.  Just thought it was worth sharing.

Technical note: I just used inverse changes in VXX to create the series for the chart above.  Good enough for illustrative purposes.

Posted on March 15, 2013, in Other, VXX, XIV. Bookmark the permalink. 3 Comments.

  1. Very interesting work, Mike.

    It would be worth trying to figure out what changes in the market to favor mean reversion or follow through. The changes may be generated by random events, but they’re not random in the traditional, short term sense of the word, since they seem to last for years.

  2. Thanks for sharing this. Would you mind clarifying at what time you are buying or selling when you are following this strategy? At the close? (If the price increased on Tuesday, do you sell at the close on Tuesday? If you had previously sold and the price then decreased on Wednesday, you would buy at the close?) The holding part, I am clear on … : )

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