CFA Practice Question

There are 208 practice questions for this study session.

CFA Practice Question

Mean reversion is a tendency for a stochastic process to remain near, or tend to return over time to a long-run average value. Which of the following tend(s) to exhibit mean reversion?

I. Interest rates.
II. Exchange rates.
III. Stock prices.
IV. Stock market returns.
A. All of them
B. I and IV
C. I, II and IV
Explanation: Can you think of a theoretical argument why interest rates or implied volatilities should be mean reverting but exchange rates or stock prices should not be?

User Contributed Comments 4

User Comment
Rotigga Stock prices have unsystematic risk; exchange rates have country-specific risk. These types of risk could drastically change the long run mean of any specific stock price or exchange rate. I and IV are less specific
dblueroom exchange rate is usually explained by random walk model, which has an undefined mean. so it cannot be mean reverting.
geofin Yes, both forex and stock prices are random walks and thus have no mean to revert to.
gkbarr88 If I can use interest rates to arbitrage, then so to will FX mean revert in line rate reversion...
You need to log in first to add your comment.