05-08-2015, 05:47 AM
Join Date: Oct 2013
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Re: Mean Reversion
Originally Posted by spareappeal »
mean reversion is a theory suggesting that prices and returns eventually move back towards the mean or average. This mean or average can be the historical average of the price or return or another relevant average such as the growth in the economy or the average return of an industry.
This theory has led to many investing strategies involving the purchase or sale of stocks or other securities whose recent performance has greatly differed from their historical averages. However, a change in returns could be a sign that the company no longer has the same prospects it once did, in which case it is less likely that mean reversion will occur. Percent returns and prices are not the only measures seen as mean reverting; interest rates or even the price-earnings ratio of a company can be subject to this phenomenon.
Maybe because investing in an asset overheats it's and sometimes it needs to cool down to launch the process again. I stick to the opinion that the higher is upsurge the deeper is collapse when it happens. What do you think?