Tim Olson
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58 lines
3.0 KiB
Markdown
58 lines
3.0 KiB
Markdown
---
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description: "Constructs a dollar-neutral ETF portfolio by selling ETFs with high Internal Bar Strength (IBS, close near daily high) and buying ETFs with low IBS (close near daily low), exploiting short-term mean-reversion."
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tags: [etfs, mean-reversion, ibs, internal-bar-strength]
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---
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# Mean-Reversion (ETFs)
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**Section**: 4.4 | **Asset Class**: ETFs | **Type**: Mean-Reversion
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## Overview
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This strategy applies mean-reversion to ETFs using the Internal Bar Strength (IBS) indicator, derived from the previous day's close, high, and low prices. ETFs with a close near their daily high (high IBS) are considered "rich" and likely to revert downward; ETFs with a close near their daily low (low IBS) are "cheap" and likely to revert upward. A dollar-neutral portfolio sells high-IBS ETFs and buys low-IBS ETFs.
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## Construction / Signal
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**Internal Bar Strength (IBS)**:
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```
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IBS = (P_C - P_L) / (P_H - P_L) (370)
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```
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Where:
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- `P_C` = previous day's closing price
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- `P_H` = previous day's high price
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- `P_L` = previous day's low price
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IBS ranges from 0 to 1:
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- IBS close to 1: price closed near the daily high → ETF is "rich"
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- IBS close to 0: price closed near the daily low → ETF is "cheap"
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An equivalent symmetric measure: `Y = IBS - 1/2 = (P_C - P_*) / (P_H - P_L)` where `P_* = (P_H + P_L) / 2`; Y ranges from -1/2 to +1/2.
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**Portfolio construction**:
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- Sort ETFs cross-sectionally by IBS.
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- Sell ETFs in the top decile (high IBS, "rich").
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- Buy ETFs in the bottom decile (low IBS, "cheap").
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- Dollar-neutral construction.
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## Entry / Exit Rules
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- **Entry**: Each day after the close, compute IBS for all ETFs, rank, and enter positions for the next day's open or close.
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- **Exit**: Typically hold for 1 day (short-term mean-reversion); close at next day's close.
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- **Rebalance**: Daily.
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## Key Parameters
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- **IBS computation**: Daily, using previous day's high, low, and close
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- **Holding period**: Short-term (typically 1 day)
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- **Portfolio construction**: Dollar-neutral long/short decile
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- **Weights**: Uniform for all long and all short ETFs, or volatility-weighted
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## Variations
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- **Volatility-weighted positions**: Weight positions by historical ETF volatility rather than equal-weighting
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- **Stock mean-reversion methods**: Mean-reversion strategies from Section 3 (cluster, weighted regression) can also be adapted to ETFs
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- **IBS threshold**: Instead of top/bottom decile, use a fixed IBS threshold (e.g., IBS > 0.8 = short, IBS < 0.2 = long)
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## Notes
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- IBS is a simple, daily-bar indicator requiring only OHLC (open-high-low-close) data.
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- Mean-reversion in ETFs can be stronger than in individual stocks because ETFs represent diversified baskets where idiosyncratic volatility is reduced, and market-maker arbitrage constrains large deviations from NAV.
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- Holding period is very short (1 day); transaction costs can be significant for daily rebalancing.
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- The strategy can be combined with other signals (e.g., sector momentum) for confirmation.
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- All stock-based mean-reversion strategies (clusters, weighted regression) can be adapted for ETF universes.
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