Mean Reversion Quotes

Reversion to the mean is the iron rule of the financial markets.

Often, investors will discover a manager after he's had a terrific run, usually when he lands on a magazine cover somewhere. Invariably, funds swell up with new investor money just before they revert to their long-term averages.

It's very difficult for any particular segment of the stock market to sustain superior performance. The watch word for our financial markets is, "reversion to the mean" i.e. what goes up must come down, and it's true more often than you can imagine.

Maximum of an average is necessarily less volatile than the average maximum.

Investors tend to discover 'hot' mutual fund managers just after a successful run and just before the inescapable force of mean reversion is about to kick in.

Profit margins are probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, there is something wrong with the system and it is not functioning properly.

Historically, we have always seen reversion to the mean. After stocks have had an unusually great 10 or 20 years, they typically turn in subpar results over the next 10 or 20, and after bad 10- to 20-year stretches, the next 10 to 20 tend to be above average.

Indeed, eventually, random outcomes all revert to the mean, meaning that streaks eventually end. Understanding this is a key part of intelligent and rational investing.

Our tree is actually a tree of the short-term interest rate. The average direction in which the short-term interest rate moves depends on the level of the rate. When the rate is very high, that direction is downward; when the rate is very low, it is upward.

I always seem to find myself fighting the law of equilibrium - the great leveling force that brings things to the mean and takes the 'cartoonishness' out of life. Perhaps I am doing a very unnatural thing... If Einstein were still alive I would ask him about it.

Yes, our tree has an interesting shape. The center branches reflect the shape of the zero curve. When extreme parts of the tree are reached the branching pattern changes to accommodate the mean reversion.

Our starting point then was trying to find a way to incorporate mean reversion into the HoLee model.

Regression toward the mean. That is, in any series of random events an extraordinary event is most likely to be followed, due purely to chance, by a more ordinary one.