Equilibrium state of a financial instrument/market
All financial instrument(s) or markets have local or global equilibrium states. For example, if S(t) represents the value of a financial asset, S , at time t and the expectation, E(S(t))
, of the stochastic process, S(t), is finite then the financial instrument, S, has a global equilibrium state. There is a number that S(t) will return to, infinitely often. The problem of finding a local equilibrium state is more difficult and we have found a way around this difficult problem. Well, the price of a financial asset depends on momentum and no one can really control when
people buy or sell a particular asset. However,
we can estimate, very well, where local
equilibrium states of a number of assets are.
Once we determine that is the closest local
equilibrium state of a given financial asset
currently, it means that within some finite time
period, which can be estimated quite well, the
price of the financial asset will have to return to
the state , all others things remaining fairly
normal.
For example, if EURUSD is currently at 1.2134 and
1.2000 is a local recurrent state for EURUSD then,
usually within a week, EURUSD is expected to
return to 1.2000. The amount of pips EURUSD can
deviate from 1.2000, in the extreme, is about
300. Therefore, EURUSD will stay away from
1.2000, bounded within 300 pips interval, before
eventually returning to 1.2000. Since 1.2000 is
fixed, we do not have problems associated with
other mean-reversion techniques.
All financial instrument(s) or markets have local or global equilibrium states. For example, if S(t) represents the value of a financial asset, S , at time t and the expectation, E(S(t))
, of the stochastic process, S(t), is finite then the financial instrument, S, has a global equilibrium state. There is a number that S(t) will return to, infinitely often. The problem of finding a local equilibrium state is more difficult and we have found a way around this difficult problem. Well, the price of a financial asset depends on momentum and no one can really control when
people buy or sell a particular asset. However,
we can estimate, very well, where local
equilibrium states of a number of assets are.
Once we determine that is the closest local
equilibrium state of a given financial asset
currently, it means that within some finite time
period, which can be estimated quite well, the
price of the financial asset will have to return to
the state , all others things remaining fairly
normal.
For example, if EURUSD is currently at 1.2134 and
1.2000 is a local recurrent state for EURUSD then,
usually within a week, EURUSD is expected to
return to 1.2000. The amount of pips EURUSD can
deviate from 1.2000, in the extreme, is about
300. Therefore, EURUSD will stay away from
1.2000, bounded within 300 pips interval, before
eventually returning to 1.2000. Since 1.2000 is
fixed, we do not have problems associated with
other mean-reversion techniques.
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