Portfolio Optimization with Mean-Reversion Speed

Summary

The document raises a portfolio construction issue for arbitrage strategies that rely on mean reversion. Price deviation indicates the potential profit if a position is held until convergence, but it does not show how quickly that profit may be realized. The author suggests that reversion speed should also affect how opportunities are compared or weighted.

The text poses this as a practical implementation question but provides no formula, optimization method, empirical evidence, or worked example. It therefore introduces a useful consideration rather than presenting a complete strategy. Readers would need further analysis to determine how to estimate convergence speed, account for uncertainty and trading costs, and combine speed with expected profit and risk.

Key ideas

• Price deviation describes potential convergence profit but not how long it may take to realize.
• Faster mean reversion can increase profit earned per unit of time.
• Arbitrage portfolio construction may need to consider both deviation size and reversion speed.
• The document asks how to implement this idea but does not provide a method or evidence.

Tags

# How to optimize an arbitrage portfolio when taking into account different speeds of mean reversion?


# How to optimize an arbitrage portfolio when taking into account different speeds of mean reversion?












In portfolio optimization, it is insufficient to just note the size of price deviation - that only tells the amount of profit if held to maturity. One also needs to take into account reversion speed - faster reversion means more profits per unit of time.

How is this implemented in practice?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.