How to Calculate Mean Reversion

••• stocks and shares image by Andrew Brown from Fotolia.com

Mean reversion refers to an economic pricing model in which the price level for virtually any given commodity experiences a consistent long-term average price regardless of short-term price movements. In other words, even though the price of a commodity may differ, or deviate, from an historic long-term average price, it can be expected to return, time and again, to that historic average. Though it is not technically possible to calculate mean reversion, as it represents a price behavior, it is possible to determine a commodity's historic price average in order to obtain a benchmark for gauging short-term fluctuations. In the case of financial assets, such as stocks, this average may be found using financial reference websites and basic spreadsheet software.

Enter the web address for a financial website into the address bar of your web browser (see Resources).

In the field at the top of the homepage, enter the name or symbol of a stock (ex. Microsoft Corp., or MSFT) and click the "Get Quotes" button just beside it.

From the menu at the left of the next screen, click "Historical Prices". Enter a date range of a least one year from the current date and click the "Update" button ("Get Prices" in Google Finance).

Click "Download to spreadsheet" at the right of the next screen (bottom of the screen in Yahoo! Finance). In the box which appears, click the "Open" button.

Once the spreadsheet has loaded, click any cell to the right of the price columns. Press and hold the CTRL key while clicking the letter above the far right price column to highlight all items in that column.

Click the small "down" arrow to the right of the "AutoSum" icon at the top of the screen (∑). From the choices which appear, click "Average". The average of all prices in the far right right column will appear in the cell chosen to the right of the price columns.

References

About the Author

Nicholas B. Sisson holds a B.A. in economics from Ithaca College and a certificate in technical communication from J.B.S. Technical Communications, Ltd. Working in investment operations, Sisson participated in an initiative to revise and rewrite his group's procedure manual. More recently, Sisson created definitions of financial terms for the glossary of a major financial website. He has been writing since 2008.

Photo Credits

  • stocks and shares image by Andrew Brown from Fotolia.com