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The financial theory suggesting asset prices and historical returns eventually return toward their long-term average.
The financial theory suggesting asset prices and historical returns eventually return toward their long-term average.
Mean reversion strategies trade against temporary extreme price extensions, buying when prices fall significantly below historical moving averages or spread equilibrium values.
Measured using z-scores, Bollinger Bands, and Ornstein-Uhlenbeck processes.
Risks include structural market breaks where price does not revert.