New answers tagged mean-reversion
Well, "mean reversion trading" could mean a lot of things, I am not qualified to describe it in full generality. However, there is a simple model of mean reversion called the Ornstein Uhlenbeck process that is often seen. It has two parameters \lambda and \sigma, where lambda is the strength of the mean reversion (so one over lambda is the mean reversion ...
Let's consider the following example: the process is initialized randomly with $\pm1$ and then stays there forever. Seems stationary to me, but it would never cross its mean.
$\theta$ is the "mean" for this process. If $X_t > \theta \implies (\theta - X_t) < 0 $, which means that the drift for the process is negative and tends towards $\theta$. The opposite case can be made for $X_t < \theta$ ; the process will have positive drift when $X_t$ is below $\theta$. Therefore we can consider $\kappa$ to be the "speed" of mean ...
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