From the perspective of mean reversion, fat tails help to create some of the best opportunities.
Mean reversion is in some august company in being well enough to read its own obituary.
Why do I think that mean reversion is still very much alive and well?
Long-term mean reversion is a powerful tool that investors can use to help them attain their long-term goals.
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Mean reversion would indicate that the VIX should eventually return to levels close to its prior trading range.
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But good profits aren't always the best thing in Ricks' model, which draws on the principle of mean reversion.
The bearish assumption is that mean reversion will narrow them, eating into profits.
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From a technical standpoint, there is the potential for mean reversion, or the return of the VIX to historical levels.
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"Mean reversion is the most powerful and reliable driver in capital markets, " said Robert Arnott, chairman of Research Affiliates, a Pasadena, Calif.
Mean reversion is one of the fundamental forces of nature and economics.
Since Apple has not participated in the strong market rally, based on the mean reversion theory, a strong case can be made to buy Apple here.
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As long as markets display such bipolar disorder and switch from periods of mania to periods of depression, then mean reversion should continue to merit worth as an investment strategy.
This lag sets the stage for a possible strong rally in gold equities relative to bullion once mean reversion to historical levels kicks in, just like it has done time and time again.
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Philosophers and mathematicians can debate what causes mean reversion, but in the case of the markets, it seems to be a "wisdom of crowds" phenomenon--the historic return represents the prices investors put on future corporate earnings, which tend to climb in the long run.
Arnott, who has managed the fund since 2002, believes mean reversion could take hold as soon as some uncertainties are taken removed from the market, especially concerning General Motors, Citigroup, and to a lesser extent, AIG and Bank of America 's merger with Merrill Lynch.
It is also worth noting that in order for mean-reversion-based strategies to work, it is not required that the mean be realized for long periods of time, but that markets continue to behave as they always have, swinging pendulum like between the depths of despair and irrational exuberance , or, from risk-on to risk-off.
In other words, because of the European-style exercise and the mean-reversion of volatility, VIX options will often trade at lower value than what seems appropriate during periods of high volatility (and vice versa in low volatility periods), particularly early on in the term of the option.
But in specific, recurring situations, reversion to the mean is the key to identifying market behavior.
If reversion to the mean means anything, the next 10 years should be good for stocks.
As far as bearish sentiment rising, it may simply represent a reversion to the mean.
Over the long term, however, reversion to the mean tends to reduce even that slim advantage.
There is a reversion to the mean return, but it requires a long enough investment period to revert.
We never know when that reversion to the mean will come to the various sectors of the stock market.
Gradual reversion to the mean seems to be carrying the day: in wealth, jobs and housing as well as share prices.
The rebound in pessimism was a reversion to the mean for bearish sentiment, which signals that worries about the economy have not faded.
So we may be getting to the stage when reversion to the mean starts working against Treasuries and in favour of equities and corporate debt.
The edges lie elsewhere, and based upon what the statistics show over and over again, it's in a reversion to the mean in short-term stock prices.
If markets were truly efficient, price-earnings ratios should be lower than average at the top of the cycle, since investors should anticipate a reversion to the mean.
Though this does somewhat reflect a reversion to the mean, it also shows that some investors are becoming less enthusiastic about the short-term direction of the stock market.
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