Reply
Fri 29 Mar, 2019 06:49 pm
I am using the following definition for mean reversion I found on the web:
"Reversion to the mean is the statistical phenomenon stating that the greater the deviation of a random variate from its mean, the greater the probability that the next measured variate will deviate less far. In other words, an extreme event is likely to be followed by a less extreme event."
My friend insists there is no requirement for randomness and uses a similar definition of mean reversion but without the word "random". The application is using mean reversion for the pricing of commodities.
So, is randomness a necessary condition for mean reversion?
Is there a better definition of mean reversion?
How can I convince my friend that mean reversion only applies to random variables?
Thanks in advance.
@PocoPete,
I agree with your friend.
How are you defining "randomness" anyway?
@PocoPete,
"In finance, the term "mean reversion" has a different meaning than "return or regression to the mean" in statistics."
https://en.wikipedia.org/wiki/Mean_reversion_(finance)
"In finance, mean reversion is the assumption that a stock's price will tend to move to the average price over time."
https://en.wikipedia.org/wiki/Regression_toward_the_mean
"Regression toward the mean simply says that, following an extreme random event, the next random event is likely to be less extreme."