Regression to the Mean and Mean Reversion in Futures Markets
Posted: 14 May 2000
This paper clarifies the distinction between regression to the mean and mean reversion. The concept of regression to the mean has been recognized in finance for more than two decades. More recently, mean reversion has received considerable attention in the finance literature. In addition, it has also been observed empirically that more extreme initial observation lead to greater subsequent reversals. Although some researchers have explained this behavior in terms of investor overreaction, this paper presents an alternative interpretation that relies solely on the statistical properties of the random variable under study.
JEL Classification: C50, G12
Suggested Citation: Suggested Citation