Testing for mean reversion in stock price series

CFA Level III
#1

Hello,

How would you test for mean reversion for stock prices?

#2

You check for farthest from mean and closest to mean and expect the former to diverge and the opposite in case of latter

#3

Not necessarily.

you go long one stock and short the other.

if all stocks are up vs their long term mean then you short the one that is up the most and go long the one that is up the least.

however if a stock is below the long term mean you go long the one that is furthest below mean and short the one with the furthest upside relative to mean.

#4

I mean statistically speaking. Which test do you think is the best for stock prices ?

#5

Augmented Dickey Fuller test (reject null of unit root) and Hurst exponent (<0.5) are the ones I use.

#6

level 2 quant called. she’s pregnant.

#7

He’s going to take great care of that child though, no question about it.