Trends and Reversion in Financial Markets on Time Scales from Minutes to Decades

TL;DR

This paper empirically investigates how financial market trends revert or persist across various time scales, revealing regimes of trending and reversion in different asset classes over minutes to decades.

Contribution

It provides comprehensive empirical analysis across multiple asset classes and time scales, testing theoretical models of market behavior and revealing regime-dependent trend dynamics.

Findings

Markets trend on time scales from hours to years.

Weak trends tend to revert or persist depending on the regime.

Empirical results support a lattice gas model of market behavior.

Abstract

We empirically analyze the reversion of financial market trends with time horizons ranging from minutes to decades. The analysis covers equities, interest rates, currencies and commodities and combines 14 years of futures tick data, 30 years of daily futures prices, 330 years of monthly asset prices, and yearly financial data since medieval times. Across asset classes, we find that markets are in a trending regime on time scales that range from a few hours to a few years, while they are in a reversion regime on shorter and longer time scales. In the trending regime, weak trends tend to persist, which can be explained by herding behavior of investors. However, in this regime trends tend to revert before they become strong enough to be statistically significant, which can be interpreted as a return of asset prices to their intrinsic value. In the reversion regime, we find the opposite pattern: weak trends tend to revert, while those trends that become statistically significant tend to persist. Our results provide a set of empirical tests of theoretical models of financial markets. We interpret them in the light of a recently proposed lattice gas model, where the lattice represents the social network of traders, the gas molecules represent the shares of financial assets, and efficient markets correspond to the critical point. If this model is accurate, the lattice gas must be near this critical point on time scales from 1 hour to a few days, with a correlation time of a few years.