Mean reversion

Mean reversion

The idea that stock prices revert to a long term level. Hence, if there is a shock in prices (unexpected jump, either up or down), prices will return or revert eventually to the level before the shock. The time it takes to revert is often referred to as the time to reversion. If the process is very persistent, it might take a long time to revert to the mean. The key difference between a mean-reverting process and a random_walk is that after the shock, the random_walk price process does not return to the old level.
References in periodicals archive ?
Liew, Baharumshah, and Chong (2004), who applied KSS tests to real bilateral exchange rates of 11 Asian countries, showed that there is no mean reversion in the real bilateral exchange rate of India when the Japanese yen is used as the numeraire.
By including the final grade earned in principles of microeconomics as an explanatory variable, we are able to test whether the learning process in microeconomics follows a pattern of mean reversion or one of persistence.
There is no evidence of long-term mean reversion in the expanded data sample.
A parsimonious parametric time series model of nonlinear mean reversion which has been shown to approximate well a broad range of nonlinearity is the smooth transition autoregressive (STAR) model, as in Terasvirta (1994).
Wolf, NBER and New York University, "Is Real Exchange Rate Mean Reversion Caused by Arbitrage?
We expect card net charge-offs to begin their mean reversion in early 2013, driven in part by portfolio growth.
Mean reversion was a notable trend as sectors that performed poorly for the year in 2011 performed well in January;
2]) should be negative and statistically significant to validate a nonlinear mean reversion in stock prices.
Examples of specific topics include managing derivatives in the presence of a smile effect and incomplete information, the relationship between corruption and economic growth, financial risk management by derivatives caused from weather conditions, evidence from crude oil futures options concerning the behavior of implied volatility surface, procyclical behavior of loan loss provisions and banking strategies, market power and banking competition on the credit market, portfolio diversification and market share analysis for Romanian insurance companies, threshold mean reversion in stock prices, corporate governance and managerial risk taking in the Tunisian context, option market microstructure, and nonlinearity and genetic algorithms in the decision making process.
For example, if the autoregressive (AR) representation of the interest rate differential switches between stationary and nonstationary regimes, then ADF unit root testing procedures will have difficulty in detecting mean reversion, and false inference may occur because of the size distortions induced by the misspecification.
Measuring composite fundamentals as proposed by Rose and Svensson [1995], we first present a direct test for the presence of mean reversion in the process driving the fundamentals.
In a series of papers, Bradford De Long, Andrei Shleifer, and Lawrence Summers have suggested that observed deviations from market efficiency, including in particular the mean reversion phenomenon, are caused by the actions of "noise traders" who act on beliefs not grounded in securities fundamentals.