Reference no: EM132408148

Momentum and Mean Reversion

Momentum and mean reversion are common trading strategy. For the purpose of this homework, a stock exhibits momentum is defined as an asset whose price returns are more likely to go up(down) on day t if the return went up(down) on day t-1. In other words, the stock exhibits a positive auto-correlation. Mean reversion is the opposite of momentum. Stocks are more likely to go up(down) on day t if that stock went down(up) on day t-1.

You are provided below with a simulated dataset of series of stock returns. These returns have been generated with a predetermined average momentum during one pe-riod and a predetermined average mean reversion in another period.

Please use dataset provided to answer the questions below. In order to do so, you will need to clean the dataset. It comes with a number of flaws commonly seen in dataset we receive.

Question:

1. In what month did the returns shift from exhibiting mean reversion to exhibiting momentum, or from momentum to mean reversion. Please output the last month that momentum(mean reversion) shift to mean reversion(momentum).

2. During the time period when these stock returns had momentum property, what was the average momentum? Please note this is a single number, average cross over all stock returns.

3. During the time period when these stock returns had mean reversion property, what was the average mean reversion?Please note this is a single number, average cross over all stock returns.