Investment strategies for stock markets with mean reversion

Abstract

In this article a comparison of different trading strategies and their resulting profitability when applied on a stock market with mean reverting properties is made. The focus is on two main strategies, dollar cost averaging and value averaging. Dollar cost averaging is an investment strategy which reduces the investment risk through the systematic purchase of securities at predetermined intervals and set amounts. Value averaging is a strategy in which an investor adjusts the amount invested to meet a prescribed target. Results indicate that value averaging does have higher expected investment returns in a mean reverting financial market when considering the cash flow stream of the investment. However, when a side-fund which provides loans and deposits is introduced into the cash flow stream, value averaging fails to outperform the market. Dollar cost averaging on the other hand does not provide superior performance to a random investing technique. © 2007 IEEE.