Thursday, April 06, 2006

Afternoon Trading: Mean Reversion

Here's an intraday version of some research I've done with daily data. I went back to the beginning of 2005 (N = 314) and calculated the average price for the morning in the ES contract. The average price was simply the average of the open-high-low-close for the period 9:30 AM - 11:59 AM EST. I then looked at how often we touch that average price level during the afternoon trade. The results are very similar to the daily trade data: we return to the average price on about 2/3 of all occasions (66%). The odds exceed 70% when there is below average volume for the afternoon. This fits with the mean reversion/non-trending theme from previous research.