What is Mean Reversion?

Mean reversion is the theory that interest rates, security prices, or various economic indicators will, over time, return to their long-term averages after a significant short-term move.

How Does Mean Reversion Work?

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 stock would decrease the next day.

Why Does Mean Reversion Matter?

Mean reversion is a mathematical method of trading and investing used by many active market participants, many of which are temporarily able to move the market.

Ask an Expert about Mean Reversion

All of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Mean Reversion.

Be the first to ask a question

If you have a question about Mean Reversion, then please ask Paul.

Ask a question
Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

Verified Content You Can Trust
verified   Certified Expertsverified   5,000+ Research Pagesverified   5+ Million Users