Mean reversion (finance)

The term mean reversion ( mean return) is the application of the theory of regression to the mean in terms of market price and volatility in the capital market theory. This refers to the theory that markets are prone to exaggeration that correct themselves over time. Therefore, a rise in the need of a future decline in price, and vice versa ( English: " What goes up, must come down and vice versa "). The extreme case are speculative bubbles. The same is true for volatility and trading volumes. The theory is contrary to the efficient market hypothesis.

Mean reversion in the current series in the future means that rates of return and interest rates fluctuate around an average value over the long term.

Mean reversion is one of the ways the simplistic to model in the Black- Scholes model as a constant assumed volatility and is part of several term structure models. Often the modeling of mean reversion relied on stochastic processes are the Ornstein - Uhlenbeck process and the root diffusion process.

• Capital Market Theory