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Thread: Is randomness is a necessary condition for mean reversion?

  1. #1
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    Is randomness a necessary condition for mean reversion?

    I am using the following definition for mean reversion I found on the web:

    "Reversion to the mean is the statistical phenomenon stating that the greater the deviation of a random variate from its mean, the greater the probability that the next measured variate will deviate less far. In other words, an extreme event is likely to be followed by a less extreme event."

    My friend insists there is no requirement for randomness and uses a similar definition of mean reversion but without the word "random". The application is using mean reversion for the pricing of commodities.

    So, is randomness a necessary condition for mean reversion?

    Is there a better definition of mean reversion?

    How can I convince my friend that mean reversion only applies to random variables?

    Thanks in advance.
    Last edited by PocoPete; Mar 29th 2019 at 03:54 PM.
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  2. #2
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    Re: Is randomness is a necessary condition for mean reversion?

    You say your friend uses a different "definition" of "reversion to the mean". This is NOT a definition, it is a property of probability distributions. I am not clear what you or your friend want to mean by "random"- that is an over used word- but it is definitely a property of probability distributions.
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