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Mean reversion is a financial term for the assumption that an asset's price will tend to converge to the average price over time. [1] [2]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.
In finance, statistical arbitrage (often abbreviated as Stat Arb or StatArb) is a class of short-term financial trading strategies that employ mean reversion models involving broadly diversified portfolios of securities (hundreds to thousands) held for short periods of time (generally seconds to days). These strategies are supported by ...
Pairs trade is a mean-reverting strategy, betting that the prices will eventually revert to their historical trends. Pairs trade is a substantially self-funding strategy, since the short sale proceeds may be used to create the long position.
And when investing in funds don’t forget the importance of mean reversion. This technical investing term effectively means that a fund’s performance moves toward its long-term average.
Bill Mann: Just a moment ago, I was warning against mean reversion investing, but here's the thing about means. They're really powerful, and they do love to revert, and the energy sector is a big ...
Continue reading → The post Understanding Reversion to the Mean appeared first on SmartAsset Blog. Will housing prices naturally come back down, and the price of blockchain tokens stabilize?
Mean reversion involves first identifying the trading range for a stock, and then computing the average price using analytical techniques as it relates to assets, earnings, etc. When the current market price is less than the average price, the stock is considered attractive for purchase, with the expectation that the price will rise.
A pairs trading strategy consists of identifying similar pairs of stocks and taking a linear combination of their price so that the result is a stationary time-series. We can then compute z-scores for the stationary signal and trade on the spread assuming mean reversion: short the top asset and long the bottom asset.