Risk glossary

 

Mean reversion

A tendency for a stochastic process to revert over time to an equilibrium level, such as the average (the mean) of historical prices, or some other variable. Interest rates, stock returns, price-earning ratios, and implied volatilities tend to exhibit mean reversion. The concept of mean reversion has been much discussed in energy markets with reference to how to best model forward prices in markets such as deregulated power.

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