Paul

Concerning your point that mean reversion should occur only for extremes 
deviations, this corresponds precisely to the threshold auto-regressive 
models. There have been a lot of study on mean reversion for economic 
variables, finding that half life are different for small shocks than 
big shocks. If you want to model this, package tsDyn has several TAR 
functions, univariate or multivariate

There is a paper that might interest you:
Ming Chien Lo (2008) "Nonlinear PPP Deviations: A Monte Carlo 
Investigation of Their Unconditional Half-Life", /Studies in Nonlinear 
Dynamics & Econometrics/: Vol. 12: No. 4, Article 5.

Best

Matthieu


Le 27. 10. 10 17:08, Paul Teetor a écrit :
> Stephen,
>
> First, did you get my posting regarding the O-U model and its limitations
> when modeling time-to-reversion?
>
> Second, I suggest reading Ernie Chan's book ("Quantitative Trading") if you
> haven't already.
>
> Third, I haven't found much research regarding the timing of mean-reversion
> trades. It's my impression that academics don't think about that sort of
> thing, and professional traders don't publish what they know. That leaves
> very little to read.
>
> For my own trading, I want two conditions before taking a mean-reversion
> trade. (1) The spread must be at an extreme value, either the top 90th
> percentile of its historical range or the bottom 10th percentile of its
> range. (2) The spread momentum must be towards the mean, not away.
>
> Those two guidelines don't guarantee a profit, and I'm sure you can find
> better ones. But, so far, they've worked for me.
>
> HTH
>
> Paul
>
>
> -----Original Message-----
> From: r-sig-finance-bounces@stat.math.ethz.ch
> [mailto:r-sig-finance-bounces@stat.math.ethz.ch] On Behalf Of Stephen
> Choularton
> Sent: Tuesday, October 26, 2010 6:25 PM
> To: r-sig-finance@stat.math.ethz.ch
> Subject: [R-SIG-Finance] cointegration&  reversion to mean
>
> Hi
>
> I am very interested in learning more about cointegration&  reversion to
> mean when used for spread trading.
>
> I have a working handle on cointegration thanks to
>
> http://quanttrader.info/public/testForCoint.html
>
> but I am getting nowhere with the Ornstein-Uhlenbeck approach to letting me
> predict time-to-profit as described in
>
> http://epchan.blogspot.com/2007/01/what-is-your-stop-loss-strategy.html
>
> and it strikes me that there must be some work on how far from the mean the
> spread has drifted before it is sensible to take a position but I haven't
> found it yet.
>
> If anyone can point me to work on all these subjects I would be most
> grateful.
> --
> Stephen Choularton Ph.D., FIoD
>
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