Mean-Reversion

1. Introduction Statistical arbitrage is a class of trading strategies that exploit temporary deviations from equilibrium relationships between correlated assets. The simplest and most widely practiced variant operates on the spread — the price difference (or a linear combination) of two cointegrated instruments — and bets on its reversion to a historical mean. This article examines a Bollinger Band–based mean reversion strategy applied to the spread. We develop the statistical foundations, formalize the trading logic, analyze parameter selection, and discuss the critical risk of non-reversion. ...

1. Introduction Bollinger Bands, introduced by John Bollinger in the 1980s, remain one of the most widely used volatility-based indicators in quantitative trading. The core idea is straightforward: price tends to oscillate within a range defined by its own recent volatility, and extreme deviations from the mean often signal the beginning of a sustained trend rather than a mere aberration. This article examines a breakout strategy that combines three technical indicators in a coherent framework: ...