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Mean Reversion Is A Strategy Practiced by Many Quantitative Hedge Funds and Day

Mean reversion is a strategy where traders bet against abnormal market movements, believing prices will revert back to a long-term average level. As a market increases or decreases unusually, attracting contrarian investors, the added selling or buying pressure can cause the market to move back towards a more typical level. For example, if Microsoft's stock price rose $7 one day without major news, a mean reversionist would expect it to fall the next day, betting it would revert back to its usual $1 daily change.

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Poulami Ghosh
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118 views1 page

Mean Reversion Is A Strategy Practiced by Many Quantitative Hedge Funds and Day

Mean reversion is a strategy where traders bet against abnormal market movements, believing prices will revert back to a long-term average level. As a market increases or decreases unusually, attracting contrarian investors, the added selling or buying pressure can cause the market to move back towards a more typical level. For example, if Microsoft's stock price rose $7 one day without major news, a mean reversionist would expect it to fall the next day, betting it would revert back to its usual $1 daily change.

Uploaded by

Poulami Ghosh
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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MEAN REVERTING

Mean reversion is a strategy practiced by many quantitative hedge funds and day
traders, and can be a self fulfilling prophecy. As a market begins to increase or
decrease abnormally, it attracts investors and traders that decide to go against the
crowd, when enough market participants have joined the contrarian side, the
market moves back toward a more manageable level.

For example, let's assume that on an average day Microsoft moves $1.00 either up
or down. If one day Microsoft's share price increases $7.00 and there was no
significant news or announcement, than a mean revisionist would most likely
believe that the stockwould decrease the next day.

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