Are stock prices reversible in time?

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Are stock prices reversible in time?

posted Sep 15, 2014

While backtesting an algorithm with specific tickers, I want to avoid the possibility of banking on a specific trend. I thought it might be a great idea to backtest each of my algorithms in forward as well as backward in time. But then I thought -- maybe this changes stock characteristic?

For example, I'd like to see how my algorithm will work will AAPL. But I don't want to overspecialize on the fact that it has been generally rising since forever. So I want to also test the algorithm if time was reversed, i.e. how much would I lose if the trend was reversed? But I'm not sure how representative it would be.

So the question is: are stock price distributions reversible in time?

I am really new to this website and investing in general. I apologize if this is a stupid question.

3 responses

Answering my own question, answer appears to be a clear NO: https://www.fields.utoronto.ca/programs/scientific/10-11/FMIPW10/TimeReversibility.pdf

Morten Sorensen

The short answer is no. Interest rates are for example usually modeled by a mean reverting process (Vasicek, CIR, etc.), whereas equity prices are usually modeled by a geometric brownian motion without mean reversion.

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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian.

In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.