• Erik Billerikay

Daily IBS effect in different sectors | How to use the IBS indicator

#IBS #backtesting #meanreversion #howtoindicator


Thanks for the suggestion by GB, we broke down the analysis of IBS to a sector level. We used the sector ETFs as a proxy for this analysis. This article will show the effectiveness of IBS for major business sectors in us and globally.


 

The powerful IBS indicator

Please read the previous article for the definition of IBS and a detailed analysis of how to use it.

https://www.billerikay.com/post/daily-ibs-effect-in-major-indices-how-to-use-the-ibs-indicator



Mean Reverting property in the US and Global equity market by sectors

To demonstrate the mean-reverting property of the US and Global equity markets by sectors, Billerikay analyzed the average daily return of each sector ETF over the past 20 years (2000-2021).


We divided the value of IBS into six brackets and calculated the average next-day return accordingly. The results can be found in the image below. We also colour-coated positive returns with green colour and negative returns with red colour for better visualization.


We can see that the IBS effect exists in the US market in general. The sector of financial services, communication services, and technology seem to show a greater degree of IBS property. An interesting note is that real estate seems to be non-mean-reverting, which makes logical sense. I guess people will not suddenly buy more houses if they see a one-day decline in the housing market.


On the other hand, the IBS effect on global equity by sector is much more prominent. The sectors that do not seem to be mean-reverting property in the US show promising IBS effects, i.e., Healthcare.

Moreover, the Energy sector seems to be non-mean-reverting on a global scale.


Conclusion

This study further demonstrates that the mean-reverting phenomenon is common among equity markets around the globe. Although there are differences in the strength of IBS effect on different sectors, it might not be significant enough to establish a trading edge. Let us know your thoughts and share with us your trading success! We will look into trading momentum in future articles, please subscribe to our YouTube channel for more content.



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Bonus

Check out our MACD strategy

https://www.billerikay.com/post/copy-of-strategy-review-how-to-use-the-macd-indicator

IBS = (Close - Low)/(High-Low);

Buy = IBS < 0.25;
Sell = IBS > 0.75;

Reference

A. S. Pagonidis, "The IBS Effect: Mean Reversion in Equity ETFs," National Association of Active Investment Managers, 2013.


Disclaimers

We are not financial advisors. Please do your own due diligence and investment research or consult a financial professional. All articles are our opinion – they are not suggestions to buy or sell any securities.

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