Speculative trading in mean reverting markets

Mean reversion is a feature largely recognized for the price processes of many financial securities and especially commodities. In the literature there are examples where some simple speculative strategies, before transaction costs, were devised to earn excess returns from such price processes. Actually, the gain opportunities of mean reversion must be corrected to account for transaction costs, which may represent a major issue. In this work we try to determine sufficient conditions for the parameters of a mean reverting price process as a function of transaction costs, to allow a speculative trader to have positive expectations when deciding to take a position. We estimate the mean reverting parameters for some commodities and correct them for transaction costs to assess whether the potential inefficiency is actually relevant for speculative purposes. (C) 2004 Elsevier B.V. All rights reserved