New Paper: The IBS Effect: Mean Reversion in Equity ETFs

I finally finished the first draft of my IBS paper. The results are quite interesting and extremely relevant if you trade equity ETFs. You can read it here.

Abstract:

I investigate mean reversion in equity ETF prices at the daily frequency by employing a simple technical indicator, Internal Bar Strength (IBS). IBS is based on the position of the day’s close in relation to the day’s range. I use it to forecast close-to-close returns with statistically and economically significant results for most instruments. A simple strategy based on IBS generates an average alpha of over 30% p.a. before transaction costs. I show that equity index ETFs have had strong and consistent mean reverting tendencies since the 90s, and that these effects can be exploited as part of a profitable trading strategy. The IBS effect is stronger during times of high volatility, in bear markets, after high-range days, after high-volume days, and early in the week.

Feedback is highly appreciated, either in the comments below or by email to qusmablog at gmail dot com.

Some of the interesting things you’ll find within:

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IBS plotted against average close-to-close returns.

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Cumulative NQ returns at 5 minute intervals after IBS < 0.2 at 15:00 CT.

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Equity curves of a simple RSI(3) strategy on QQQ, with and without IBS filter.

 Update: the comparison chart for the Australian ETF now correctly uses EWA instead of EWO (the Austrian ETF).