Mean-Reversion Half-Life of Spreads — Ornstein–Uhlenbeck Intuition & Practical Uses
Continuous-time OU mapping, discrete AR(1) estimation, horizons vs turnover and transaction-cost floors.
Higher education in Financial Engineering and Money & Capital Markets. SPK (Turkey CMB) licence. 16 years across institutional markets, research, and quant-driven analytics.
Continuous intuition
An OU process: \[ dX_t = \theta (\mu - X_t) dt + \sigma dW_t \] has half-life \(h = \ln(2)/\theta\) — time for expected deviation from mean to halve.Discrete proxy
Estimate AR(1) on spread samples \(X_t = a + b X_{t-1} + \epsilon_t\); map \(b\) to \(\theta\) under appropriate sampling frequency alignment.
Strategy mapping
If half-life is shorter than your minimum trade horizon after costs, edge is non-actionable.
Finvestopia context
We narrate duration of dislocations on macro pairs — half-life language quantifies that duration statistically.Related entries
Engle–Granger intuition, half-life of spread, why high correlation does not imply tradable stationarity of the spread.
Block bootstrap vs parametric paths, copulas for joint shocks, and separating model risk from sampling noise.
Educational content authored by our team — informational only, not investment advice.