Mean reversion effect

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The term mean reversion ( average return ) is in the capital market theory an extension of regression to the mean for negative autocorrelation in terms of market price and volatility changes. What is meant is the theory that markets tend to exaggerate, which not only correct themselves accidentally over time, but have a "memory" and reverse previous trends. Therefore, a price increase results in the need for a future price decrease (English: " What goes up, must come down ") and vice versa. The extreme case is speculative bubbles . The same applies to volatilities and sales volumes. The theory is in contrast to the market efficiency hypothesis .

Mean reversion means for ongoing into the future series that yield rates and interest rates in the long term not just about an average value vary, but even actively return to this.

Mean reversion is one of the possibilities to simplify the Black-Scholes model to model volatility assumed as constant , and is part of several interest structure models . Frequently used stochastic processes for modeling mean reversion are the Ornstein-Uhlenbeck process and the root diffusion process .