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Sep 25, 2023 · Mean reversion is a financial theory that suggests asset prices will eventually return to their long-term mean or average. Learn how investors use mean reversion for trading, risk management and algorithmic trading, and how to calculate it using statistical tools.
Learn how to identify mean reversion in time series using the Augmented Dickey-Fuller test. See how to apply the test to Google stock data and interpret the results for trading purposes.
Learn how to use Monte Carlo simulation to model mean reversion and other factors in time series equations. See how to compute volatility, variance and standard deviation with and without mean reversion and how to test its existence.
Aug 21, 2024 · Mean reversion is a theory stating that certain economic and financial metrics tend to revert or return to their original mean levels, despite long-term variations. That is fluctuations or deviations in economic conditions even out in due course.
Learn how to identify and model mean-reversion in financial time series using stationarity, structure function, and Ornstein-Uhlenbeck process. See examples of mean-reversion in stock prices, ETFs, and portfolios.
Mean reversion formula. To understand and calculate mean reversion, traders need to calculate the mean. The mean is the average price over a given number of data points. On an asset’s trading chart, the mean is easily represented by a simple moving average (SMA). The SMA calculates the average price in the price series.
Using mean reversion as a timing strategy involves both the identification of the trading range for a security and the computation of the average price using quantitative methods. Mean reversion is a phenomenon that can be exhibited in a host of financial time-series data, from price data, earnings data, and book value. [3]
