Exploiting Short-Term Mean Reversion Between Stocks and Bonds

Introduction

Mean-reversion strategies are well-known and often serve as valuable diversifiers to strategies like momentum. While most traders focus on stock-specific mean reversion, mean reversion across different asset classes, such as stocks and bonds, is typically less explored. In this blog post, I discuss and test recent research documenting a short-term mean reversion pattern between stocks and bonds. My findings suggest that the strategy can achieve an 8-9% CAGR after costs, with high positive skewness and zero correlation to S&P 500 returns.

Contents

• Background

• Strategy

  • Data

  • Regression Tests

  • Strategy with EOD Data

  • Strategy with Intraday Data

• Conclusion