Ready for a Correction

[Pooperman]

A correction is a small bear drop (5%-20%) during a bull market. Generally, it's in reaction to prices getting to far ahead of themselves. Contrast this with a bear market rally, where prices have fallen too far and rally as a result.

[StockBeard]

I know I shouldn't be paying attention and keep the course, but man, the past 5 days have been difficult to stomach.

[Left]

A correction is a small bear drop (5%-20%) during a bull market. Generally, it's in reaction to prices getting to far ahead of themselves. Contrast this with a bear market rally, where prices have fallen too far and rally as a result.

my mind is missing part of the concept i think... if i was ready to spend $x on the item last week, and i go to the store this week and it is for 20% off, i would still buy it... i mean its like going to the mall, if i plan to buy it, i go, them hanging 20% off signs didnt get me into the store in the first place. sure it is a nice discount but it did nothing to motivate me to buy, or make me value the purchase as less/cheaper. i will still use the crap out of it even if i bought it at full price.

if you mean that the prices of stocks got inflated because of hype, and a correction is them reseting the tables, like end of a poker game. then sure, everyone gets a new set of cards but it doesnt change the rules of the game, just like the businesses havent changed how they operate before the correction. so why would i value them less during correction? IE, why would i act differently now that the markets are down? I might buy more since it is a cheaper buy in for the game, but why are people quitting it/pulling money out?

[Pooperman]

A correction is a small bear drop (5%-20%) during a bull market. Generally, it's in reaction to prices getting to far ahead of themselves. Contrast this with a bear market rally, where prices have fallen too far and rally as a result.

my mind is missing part of the concept i think... if i was ready to spend $x on the item last week, and i go to the store this week and it is for 20% off, i would still buy it... i mean its like going to the mall, if i plan to buy it, i go, them hanging 20% off signs didnt get me into the store in the first place. sure it is a nice discount but it did nothing to motivate me to buy, or make me value the purchase as less/cheaper. i will still use the crap out of it even if i bought it at full price.

if you mean that the prices of stocks got inflated because of hype, and a correction is them reseting the tables, like end of a poker game. then sure, everyone gets a new set of cards but it doesnt change the rules of the game, just like the businesses havent changed how they operate before the correction. so why would i value them less during correction? IE, why would i act differently now that the markets are down? I might buy more since it is a cheaper buy in for the game, but why are people quitting it/pulling money out?

Correct. Generally, people pull money out because something causes them to view stocks as being overvalued (a drop in perceived NAV). You also have to factor in the market-timing aspect, where the market is driven by herd behavior (up and down). But, a correction comes when enough people realize that stocks are over priced and sell to get their profits. This causes a chain reaction of people selling (buy low, sell high), and the market drops. At some point, the market hits a point where people like you or me go "oh damn, stocks on sale, gonna buy". When that happens, the correction stops and comes back towards the "true" value of the asset (stock).

In simple terms, stocks got too far away from the "true" value that is given by overall economics like employment, interest rates, inflation, etc. At least they will return to just around "true" value, at most, they will go on sale.

[Mr. Green]

Here I thought we might end the day only down a little bit but it seems like things are trending back down toward a big loss. Looks like I'll be placing a big purchase order after all!

[Left]

so why arent positive growths called corrections? i mean if stocks jumped 5-20% in a short time, maybe they were all undervalued and just correcting it by making them more expensive, i mean you said after the drop, there is going to be another run up on markets as people pump money in again. why not call that event a correction?

my view is that the drop is from panic and not an over valuation of the markets, and the correction would be making them be worth what it is before the crisis/panic... 

i probably needed to take economic classes in college but i didnt

 

[a1smith]

Note: if you don't have WSJ subscription just google the title of the article and select it from search list.  Then you can read the whole article.

Not working for me.

Try this link - it is the google search.  Should be the first search result.

https://www.google.com/search?q=China+Shares+Wipe+Out+All+Gains+This+Year

[a1smith]

Here I thought we might end the day only down a little bit but it seems like things are trending back down toward a big loss. Looks like I'll be placing a big purchase order after all!

If you wanted the lows of the day you should have bought in the first ten minutes.  A couple of my ETF's were down over 20% then.  Good thing I didn't do anything; they recovered fairly well and ended up down about the same as the market (-4%).  I didn't check at the time but I'm guessing the spreads were huge.

[mohawkbrah]

checked my index fund this morning. dropped 1000p (10% drop) in one day. lucky thing it's payday today and time for a top up :D :D :D

[Miss Prim]

Why I hate (all in good fun, that is) these inevitable threads as the markets go down:

2. We get all those in the accumulation phase cheering for everything to get all f'ed up for those who are post-accumulation. It's like fucking dancing on someone's grave or throwing a party in a person's office (while they're still sitting there) who just got laid off, because you get to take over their corner office.

I'm a post-accumulation retiree and I am happily using my cash portion of my portfolio to buy!  Moving some money around and waiting to see if it drops lower.  I am not sweating it.  Even retirees can take advantage of a market dip.

                                                                                                 Miss Prim

[Kaspian]

so why arent positive growths called corrections? i mean if stocks jumped 5-20% in a short time, maybe they were all undervalued and just correcting it by making them more expensive, i mean you said after the drop, there is going to be another run up on markets as people pump money in again.

Haha... Because the word "rally" is much more fun.  We live in an Orwellian world where every word has to have some positive type of connotation.  "Correction" sounds better than "taking a crap"--like a corrections a good thing and it's to be expected and a good think.  But if it's going up?  Hell, you can put an even bigger spin on it--"Rally!!"  Which reminds us of sports cars and dragsters or getting your team together at the last second to vanquish the enemy, and other cool stuff like that.

[Abe]

I think even in retirement the market downturns are only a real problem if they are persistent for years. If one has excess bond income, you could re allocate that to get more equity exposure and come out even or ahead in the long run!


Also, the market is always right, so only good things can be said about it. Or else!

[Vorpal]

Well, today ended on an interesting note. Looks like we're about 12% off of the high. I wonder how low we can go??? This is exciting, but somewhat frustrating since I don't have a pile of cash ready and waiting (as I shouldn't), and we don't get paid until the 31st.

[2Birds1Stone]

Stings a bit to see a YTD loss of 1 year living expenses.

Long term, it shouldn't matter too much.

[Vorpal]

Stings a bit to see a YTD loss of 1 year living expenses.

Long term, it shouldn't matter too much.

I hear you; I just remind myself that it's not a loss unless I sell. I still own the same amount of each of those companies, and now it costs less to buy more.

[2Birds1Stone]

Stings a bit to see a YTD loss of 1 year living expenses.

Long term, it shouldn't matter too much.

I hear you; I just remind myself that it's not a loss unless I sell. I still own the same amount of each of those companies, and now it costs less to buy more.

I have to disagree. A loss is a loss. Sure you lock it in when you sell, but for all accounting purposes (net worth, FIRE calc's, withdrawal rates) your portfolio value on any given day is what it is.

You have absolutely no guarantees that those companies will return to previous price, or keep dropping for that matter, all you can do is see what its worth today.

That being said, maybe we all need to stop looking at our account balances so frequently.

[Zaga]

Stings a bit to see a YTD loss of 1 year living expenses.

Long term, it shouldn't matter too much.

I hear you; I just remind myself that it's not a loss unless I sell. I still own the same amount of each of those companies, and now it costs less to buy more.

I have to disagree. A loss is a loss. Sure you lock it in when you sell, but for all accounting purposes (net worth, FIRE calc's, withdrawal rates) your portfolio value on any given day is what it is.

You have absolutely no guarantees that those companies will return to previous price, or keep dropping for that matter, all you can do is see what its worth today.

That being said, maybe we all need to stop looking at our account balances so frequently.

Perhaps we should, but perhaps it's like the urge to poke at a bruise or pick at a scab.  We're just checking to see how much it hurts :-)

[milesdividendmd]

Or look at a traffic accident. We are human not Homo Economicus. What we should logically do has very little to do with what we actually do.

[milesdividendmd]

Makes sense as long as you deduct 20% when if the $CDN rallies.

True. Although I corrected it for you. There is nothing on the horizon that suggests the CDN to USD exchange is going anywhere good for a long time.

I suppose "if" is technically accurate, it's just a terribly low probability play to expect that the CAD will never again strengthen relative to the dollar.  Few laws in investing are as robust as reversion to the mean.

[beltim]

Makes sense as long as you deduct 20% when if the $CDN rallies.

True. Although I corrected it for you. There is nothing on the horizon that suggests the CDN to USD exchange is going anywhere good for a long time.

I suppose "if" is technically accurate, it's just a terribly low probability play to expect that the CAD will never again strengthen relative to the dollar.  Few laws in investing are as robust as reversion to the mean.

Not in currencies.  There are tons of currencies that have long term trends that don't revert to some magical level.

[nobodyspecial]

Not in currencies.  There are tons of currencies that have long term trends that don't revert to some magical level.

But not when both are developed economies and one relies on the other for the majority of it's trade.

The CDN$ is basically an index of US housing starts (lumber exports) and iPhone sales (copper sales to china)

[milesdividendmd]

Not in currencies.  There are tons of currencies that have long term trends that don't revert to some magical level.

But not when both are developed economies and one relies on the other for the majority of it's trade.

The CDN$ is basically an index of US housing starts (lumber exports) and iPhone sales (copper sales to china)

Nailed it!

[beltim]

Not in currencies.  There are tons of currencies that have long term trends that don't revert to some magical level.

But not when both are developed economies and one relies on the other for the majority of it's trade.

The CDN$ is basically an index of US housing starts (lumber exports) and iPhone sales (copper sales to china)

I disagree.  You've restricted the number of possible situations by a lot, but consider:
Mexico/USD
or JPY/USD
or French franc/Deutche mark before the introduction of the Euro

[tomq04]

I'm watching the interesting levels of note, particularly the 52 week low (we just blew through it) and the 104 week low (S&P ~1700).  Those prove to both be good buy points, so buying now, and continuing to buy at S&P 1700.

If you have >10 year time frame than just buy like nothing happened, nothing to see here.  I just enjoy watching the charts and resistance/support analysis.

[milesdividendmd]

Not in currencies.  There are tons of currencies that have long term trends that don't revert to some magical level.

But not when both are developed economies and one relies on the other for the majority of it's trade.

The CDN$ is basically an index of US housing starts (lumber exports) and iPhone sales (copper sales to china)

I disagree.  You've restricted the number of possible situations by a lot, but consider:
Mexico/USD
or JPY/USD
or French franc/Deutche mark before the introduction of the Euro

The exception proves the rule, (besides the fact that Mexico is not a developed country, and neither of the other examples are responsible for the majority of the others trade.)

The canadian dollar will likely continue to do as well as resources/cpmmodities (particularly oil) do.

Why did you not not include the CAD/Dollar chart, by the way?  (since that is what we are discussing.)

[beltim]

Not in currencies.  There are tons of currencies that have long term trends that don't revert to some magical level.

But not when both are developed economies and one relies on the other for the majority of it's trade.

The CDN$ is basically an index of US housing starts (lumber exports) and iPhone sales (copper sales to china)

I disagree.  You've restricted the number of possible situations by a lot, but consider:
Mexico/USD
or JPY/USD
or French franc/Deutche mark before the introduction of the Euro

The exception proves the rule, (besides the fact that Mexico is not a developed country, and neither of the other examples are responsible for the majority of the others trade.)

The canadian dollar will likely continue to do as well as resources/cpmmodities (particularly oil) do.

Why did you not not include the CAD/Dollar chart, by the way?  (since that is what we are discussing.)

Are there any comparable examples to the US/Canada in your eyes?  If you're really arguing that it's unique, that's fine, but the original statement was:

Few laws in investing are as robust as reversion to the mean.

If "robust" equals "in this case" then fine, but I don't see how your original statement is born by the facts, nor by your increasingly narrow set of criteria: developed countries, one country is responsible for a majority of the trade..

Doesn't sound like the most robust law to me.

[sol]

After I retire, I'm writing a book about mean reversion.  The caveman who thinks the spread of fire is a fad, and everyone will soon revert back to raw mammoth meat.  Buggy whip producers who expect their sales to revert as soon as people get over their fascination with automobiles.  Retail sales corps who are sure brick and mortar store sales will revert as soon as the internet stops growing, any day now honest.

Does the fact that Netflix and Apple have grown 3000% mean that they are destined to grow more slowly in the future, or are they, like fire and the automobile and the internet, transformative technologies that will reshape society in ways the caveman can't yet envision?

Reversion to the mean only has relevance under normal probability distributions.  If your country gets nuked, don't expect the currency to come back.

[milesdividendmd]

You cherry pick three charts (with different time frames!) and no relationship to the statement in question as proof that reversion to the mean does not apply to currencies.

Your charts provide no such proof of your original statement and do not prove that reversion to the mean does not apply to currency trading, (it's actually a common approach to trading currencies.)

If you have actual evidence that reversion to the mean does not apply to currency trades, please share it.  I'd love to learn something new. 

Your current evidence is analogous to saying that markets don't appreciate because of Russia. china, and germany which have all had stock markets go to zero.

[beltim]

You cherry pick three charts (with different time frames!) and no relationship to the statement in question as proof that reversion to the mean does not apply to currencies.

Your charts provide no such proof of your original statement and do not prove that reversion to the mean does not apply to currency trading, (it's actually a common approach to trading currencies.)

If you have actual evidence that reversion to the mean does not apply to currency trades, please share it.  I'd love to learn something new. 

Your current evidence is analogous to saying that markets don't appreciate because of Russia. china, and germany which have all had stock markets go to zero.

You're complaining that my three data points (literally the first three I looked up, so it's cherry picking in name recognition I suppose) is insufficient to disprove your claim that you support with NO data?

Okay. First, you prove your claim, or even supply a modicum of evidence, and then I'll respond. Until then, your assertion is worth exactly the same as the evidence you've supplied - zero.

[milesdividendmd]

After I retire, I'm writing a book about mean reversion.  The caveman who thinks the spread of fire is a fad, and everyone will soon revert back to raw mammoth meat.  Buggy whip producers who expect their sales to revert as soon as people get over their fascination with automobiles.  Retail sales corps who are sure brick and mortar store sales will revert as soon as the internet stops growing, any day now honest.

Does the fact that Netflix and Apple have grown 3000% mean that they are destined to grow more slowly in the future, or are they, like fire and the automobile and the internet, transformative technologies that will reshape society in ways the caveman can't yet envision?

Reversion to the mean only has relevance under normal probability distributing.  If your country gets nuked, don't expect the currency to come back.

For every "fire" and "internet" there are thousands of inventions that recede into nothing or never emerge.  The transformative power is what makes things like the wheel noteworthy.  In other words your consideration of their failure to revert to the mean (yet) may merely be selection bias.  You are focusing on tail events (automobiles, internet, fire, nuclear war) to the exclusion of the much more probable "normal" events.

[nobodyspecial]

True - reversion to the mean is not a global rule of currencies.

But the US$/ CDN$ is not a general case of two random currencies - Canada is essentially a US commodity index
(although with stronger beer, bigger balls and a longer field)

Anyway it is completely off topic to the central argument of the thread which is = DON"T PANIC and BUY BUY BUY !!!!!

[milesdividendmd]

You cherry pick three charts (with different time frames!) and no relationship to the statement in question as proof that reversion to the mean does not apply to currencies.

Your charts provide no such proof of your original statement and do not prove that reversion to the mean does not apply to currency trading, (it's actually a common approach to trading currencies.)

If you have actual evidence that reversion to the mean does not apply to currency trades, please share it.  I'd love to learn something new. 

Your current evidence is analogous to saying that markets don't appreciate because of Russia. china, and germany which have all had stock markets go to zero.

You're complaining that my three data points (literally the first three I looked up, so it's cherry picking in name recognition I suppose) is insufficient to disprove your claim that you support with NO data?

Okay. First, you prove your claim, or even supply a modicum of evidence, and then I'll respond. Until then, your assertion is worth exactly the same as the evidence you've supplied - zero.

http://actuaries.asn.au/Library/fsf06_paper_asher_mean%20reversion.pdf

(yawn)

[sol]

For every "fire" and "internet" there are thousands of inventions that recede into nothing or never emerge.

Right, and that's exactly the challenge.  Is Apple's 3000% growth the former or the latter?  Will it mean revert to market average returns, or continued to outperform and come to dominate the entire global economy?

Switching from coal to oil is perhaps a better analogy for currencies.  As the world changes, some things are relegated to perpetual second (and dropping) place.  I think CAD is probably safe, but there are certainly more failed currencies in the world today than there are successful ones.  Everyone who bet on them lost.

Over long enough time scales, they all revert to zero anyway.

[beltim]

You cherry pick three charts (with different time frames!) and no relationship to the statement in question as proof that reversion to the mean does not apply to currencies.

Your charts provide no such proof of your original statement and do not prove that reversion to the mean does not apply to currency trading, (it's actually a common approach to trading currencies.)

If you have actual evidence that reversion to the mean does not apply to currency trades, please share it.  I'd love to learn something new. 

Your current evidence is analogous to saying that markets don't appreciate because of Russia. china, and germany which have all had stock markets go to zero.

You're complaining that my three data points (literally the first three I looked up, so it's cherry picking in name recognition I suppose) is insufficient to disprove your claim that you support with NO data?

Okay. First, you prove your claim, or even supply a modicum of evidence, and then I'll respond. Until then, your assertion is worth exactly the same as the evidence you've supplied - zero.

http://actuaries.asn.au/Library/fsf06_paper_asher_mean%20reversion.pdf

(yawn)

That paper says commodities trade at equivalent purchasing power parity. It doesn't talk about one currency relative to another. Unless there's a quote you'd like to extract showing it saying anything relevant to your point?

[a1smith]

You cherry pick three charts (with different time frames!) and no relationship to the statement in question as proof that reversion to the mean does not apply to currencies.

Your charts provide no such proof of your original statement and do not prove that reversion to the mean does not apply to currency trading, (it's actually a common approach to trading currencies.)

If you have actual evidence that reversion to the mean does not apply to currency trades, please share it.  I'd love to learn something new. 

Your current evidence is analogous to saying that markets don't appreciate because of Russia. china, and germany which have all had stock markets go to zero.

You're complaining that my three data points (literally the first three I looked up, so it's cherry picking in name recognition I suppose) is insufficient to disprove your claim that you support with NO data?

Okay. First, you prove your claim, or even supply a modicum of evidence, and then I'll respond. Until then, your assertion is worth exactly the same as the evidence you've supplied - zero.

http://actuaries.asn.au/Library/fsf06_paper_asher_mean%20reversion.pdf

(yawn)

The paper is "Mean reversion in investment markets: a survey"; we're talking about currency markets.  ;-)

[milesdividendmd]

For every "fire" and "internet" there are thousands of inventions that recede into nothing or never emerge.

Right, and that's exactly the challenge.  Is Apple's 3000% growth the former or the latter?  Will it mean revert to market average returns, or continued to outperform and come to dominate the entire global economy?

Switching from coal to oil is perhaps a better analogy for currencies.  As the world changes, some things are relegated to perpetual second (and dropping) place.  I think CAD is probably safe, but there are certainly more failed currencies in the world today than there are successful ones.  Everyone who bet on them lost.

Over long enough time scales, they all revert to zero anyway.

Totally agree.

[a1smith]

Ok, here is a plot of CADUSD since 8/10/1953.  The mean value of the 62 year period is 0.8789.

[milesdividendmd]

You cherry pick three charts (with different time frames!) and no relationship to the statement in question as proof that reversion to the mean does not apply to currencies.

Your charts provide no such proof of your original statement and do not prove that reversion to the mean does not apply to currency trading, (it's actually a common approach to trading currencies.)

If you have actual evidence that reversion to the mean does not apply to currency trades, please share it.  I'd love to learn something new. 

Your current evidence is analogous to saying that markets don't appreciate because of Russia. china, and germany which have all had stock markets go to zero.

You're complaining that my three data points (literally the first three I looked up, so it's cherry picking in name recognition I suppose) is insufficient to disprove your claim that you support with NO data?

Okay. First, you prove your claim, or even supply a modicum of evidence, and then I'll respond. Until then, your assertion is worth exactly the same as the evidence you've supplied - zero.

http://actuaries.asn.au/Library/fsf06_paper_asher_mean%20reversion.pdf

(yawn)

The paper is "Mean reversion in investment markets: a survey"; we're talking about currency markets.  ;-)

Perhaps a more thorough reading of the paper (ie reading more than just the title) would be helpful here?

Let me help you out.  Perhaps your computer is not so good at opening attachments.  Section 2.1 is entitled "currency markets" and its conclusion is...

Small deviations from PPP present little in the way of profitable arbitrage
opportunities, and can remain for some time. Large deviations from the productivity weighted
PPP do however produce a speedy and measurable mean reversion.

[schoenbauer]

The thing that I like the most about this correction is to watch my psych/emotions during the downturn. How do I feel and how strong is my emotional belief into the markets - a joyful experience (also I'm only in the 3rd year of investing, so I anyways don't have much to lose. And thusfar I have only experienced a bull market).

[beltim]

You cherry pick three charts (with different time frames!) and no relationship to the statement in question as proof that reversion to the mean does not apply to currencies.

Your charts provide no such proof of your original statement and do not prove that reversion to the mean does not apply to currency trading, (it's actually a common approach to trading currencies.)

If you have actual evidence that reversion to the mean does not apply to currency trades, please share it.  I'd love to learn something new. 

Your current evidence is analogous to saying that markets don't appreciate because of Russia. china, and germany which have all had stock markets go to zero.

You're complaining that my three data points (literally the first three I looked up, so it's cherry picking in name recognition I suppose) is insufficient to disprove your claim that you support with NO data?

Okay. First, you prove your claim, or even supply a modicum of evidence, and then I'll respond. Until then, your assertion is worth exactly the same as the evidence you've supplied - zero.

http://actuaries.asn.au/Library/fsf06_paper_asher_mean%20reversion.pdf

(yawn)

The paper is "Mean reversion in investment markets: a survey"; we're talking about currency markets.  ;-)

Perhaps a more thorough reading of the paper (ie reading more than just the title) would be helpful here?

Let me help you out.  Perhaps your computer is not so good at opening attachments.  Section 2.1 is entitled "currency markets" and its conclusion is...

Small deviations from PPP present little in the way of profitable arbitrage
opportunities, and can remain for some time. Large deviations from the productivity weighted
PPP do however produce a speedy and measurable mean reversion.

It's illustrative that you follow condescension with a quote from your source that talks about commodities reverting to the "productivity weighted purchasing power parity" mean.  Even more so when I already pointed that out upthread.

Next time please provide a source that actually addresses your claim that currency exchange rates revert to some mean.

[milesdividendmd]

You cherry pick three charts (with different time frames!) and no relationship to the statement in question as proof that reversion to the mean does not apply to currencies.

Your charts provide no such proof of your original statement and do not prove that reversion to the mean does not apply to currency trading, (it's actually a common approach to trading currencies.)

If you have actual evidence that reversion to the mean does not apply to currency trades, please share it.  I'd love to learn something new. 

Your current evidence is analogous to saying that markets don't appreciate because of Russia. china, and germany which have all had stock markets go to zero.

You're complaining that my three data points (literally the first three I looked up, so it's cherry picking in name recognition I suppose) is insufficient to disprove your claim that you support with NO data?

Okay. First, you prove your claim, or even supply a modicum of evidence, and then I'll respond. Until then, your assertion is worth exactly the same as the evidence you've supplied - zero.

http://actuaries.asn.au/Library/fsf06_paper_asher_mean%20reversion.pdf

(yawn)

The paper is "Mean reversion in investment markets: a survey"; we're talking about currency markets.  ;-)

Perhaps a more thorough reading of the paper (ie reading more than just the title) would be helpful here?

Let me help you out.  Perhaps your computer is not so good at opening attachments.  Section 2.1 is entitled "currency markets" and its conclusion is...

Small deviations from PPP present little in the way of profitable arbitrage
opportunities, and can remain for some time. Large deviations from the productivity weighted
PPP do however produce a speedy and measurable mean reversion.

It's illustrative that you follow condescension with a quote from your source that talks about commodities reverting to the "productivity weighted purchasing power parity" mean.  Even more so when I already pointed that out upthread.

Next time please provide a source that actually addresses your claim that currency exchange rates revert to some mean.

Still waiting for evidence of your claim Beltim.

Yawn.

[beltim]

You cherry pick three charts (with different time frames!) and no relationship to the statement in question as proof that reversion to the mean does not apply to currencies.

Your charts provide no such proof of your original statement and do not prove that reversion to the mean does not apply to currency trading, (it's actually a common approach to trading currencies.)

If you have actual evidence that reversion to the mean does not apply to currency trades, please share it.  I'd love to learn something new. 

Your current evidence is analogous to saying that markets don't appreciate because of Russia. china, and germany which have all had stock markets go to zero.

You're complaining that my three data points (literally the first three I looked up, so it's cherry picking in name recognition I suppose) is insufficient to disprove your claim that you support with NO data?

Okay. First, you prove your claim, or even supply a modicum of evidence, and then I'll respond. Until then, your assertion is worth exactly the same as the evidence you've supplied - zero.

http://actuaries.asn.au/Library/fsf06_paper_asher_mean%20reversion.pdf

(yawn)

The paper is "Mean reversion in investment markets: a survey"; we're talking about currency markets.  ;-)

Perhaps a more thorough reading of the paper (ie reading more than just the title) would be helpful here?

Let me help you out.  Perhaps your computer is not so good at opening attachments.  Section 2.1 is entitled "currency markets" and its conclusion is...

Small deviations from PPP present little in the way of profitable arbitrage
opportunities, and can remain for some time. Large deviations from the productivity weighted
PPP do however produce a speedy and measurable mean reversion.

It's illustrative that you follow condescension with a quote from your source that talks about commodities reverting to the "productivity weighted purchasing power parity" mean.  Even more so when I already pointed that out upthread.

Next time please provide a source that actually addresses your claim that currency exchange rates revert to some mean.

Still waiting for evidence of your claim Beltim.

Yawn.

I provided three contrary examples.  You can argue that they're cherry picking, but the fact is that you have provided no evidence for your original claim that mean reversion occurs in currencies.

I'm resigned to not being able to convince you, but I'd just like to point out to anyone else who cares that you still haven't provided evidence for your claim, and are instead responding by asking me to prove the negative of your claim.  That's silly, since you made the original claim, but hey, at least I provided some data.  Three data points are more than zero.

[milesdividendmd]

You cherry pick three charts (with different time frames!) and no relationship to the statement in question as proof that reversion to the mean does not apply to currencies.

Your charts provide no such proof of your original statement and do not prove that reversion to the mean does not apply to currency trading, (it's actually a common approach to trading currencies.)

If you have actual evidence that reversion to the mean does not apply to currency trades, please share it.  I'd love to learn something new. 

Your current evidence is analogous to saying that markets don't appreciate because of Russia. china, and germany which have all had stock markets go to zero.

You're complaining that my three data points (literally the first three I looked up, so it's cherry picking in name recognition I suppose) is insufficient to disprove your claim that you support with NO data?

Okay. First, you prove your claim, or even supply a modicum of evidence, and then I'll respond. Until then, your assertion is worth exactly the same as the evidence you've supplied - zero.

http://actuaries.asn.au/Library/fsf06_paper_asher_mean%20reversion.pdf

(yawn)

The paper is "Mean reversion in investment markets: a survey"; we're talking about currency markets.  ;-)

Perhaps a more thorough reading of the paper (ie reading more than just the title) would be helpful here?

Let me help you out.  Perhaps your computer is not so good at opening attachments.  Section 2.1 is entitled "currency markets" and its conclusion is...

Small deviations from PPP present little in the way of profitable arbitrage
opportunities, and can remain for some time. Large deviations from the productivity weighted
PPP do however produce a speedy and measurable mean reversion.

It's illustrative that you follow condescension with a quote from your source that talks about commodities reverting to the "productivity weighted purchasing power parity" mean.  Even more so when I already pointed that out upthread.

Next time please provide a source that actually addresses your claim that currency exchange rates revert to some mean.

Still waiting for evidence of your claim Beltim.

Yawn.

I provided three contrary examples.  You can argue that they're cherry picking, but the fact is that you have provided no evidence for your original claim that mean reversion occurs in currencies.

I'm resigned to not being able to convince you, but I'd just like to point out to anyone else who cares that you still haven't provided evidence for your claim, and are instead responding by asking me to prove the negative of your claim.  That's silly, since you made the original claim, but hey, at least I provided some data.  Three data points are more than zero.

I provided an academic paper with the following conclusion about currency market trading:

"Large deviations from the productivity weighted PPP do however produce a speedy and measurable mean reversion."

If you have any academic evidence to support your claim, please share it.  I am certainly no expert on currency markets, and merely am of the belief that when investing internationally you should either always or never hedge because currency risk tends to cancel itself out over long time horizons (ie revert to the mean.) 

[beltim]

I provided an academic paper with the following conclusion about currency market trading:

"Large deviations from the productivity weighted PPP do however produce a speedy and measurable mean reversion."

If you have any academic evidence to support your claim, please share it.  I am certainly no expert on currency markets, and merely am of the belief that when investing internationally you should either always or never hedge because currency risk tends to cancel itself out over long time horizons (ie revert to the mean.)

Alright, I think I see the problem -  you're misreading the paper.  Let's look at what that section actually says:

Identical commodities should sell at identical prices in different markets – after allowing for costs of transport. Rogoff (1996), in a valuable literature review, outlines a puzzle that – in the short run at least - they do not. In that paper, he suggests that while economists all believe that purchasing power parity (PPP) should hold in some form or other, it had taken some 400 years of research to find persuasive data to demonstrate that prices do tend to revert to the expected mean.

Now pair that with the conclusion:

It certainly appears to me that recent research has resolved the puzzle of PPP. Small deviations from PPP present little in the way of profitable arbitrage opportunities, and can remain for some time. Large deviations from the productivity weighted PPP do however produce a speedy and measurable mean reversion.

So the paper is saying exchange rates revert to PPP.  But you are assuming that that statement is equivalent to saying that exchange rates revert to a nominal mean.  There is simply no support for that statement anywhere in anything that you've quoted.

Perhaps you'd listen better to another source.  I direct you to http://2012books.lardbucket.org/books/policy-and-theory-of-international-finance/s09-05-ppp-in-the-long-run.html which shows that although exchange rates do fluctuate around a PPP level, this level is not constant.  The example they show in Figure 6.4 is the US/UK exchange rate since 1913, and actual exchange rates fluctuate around the theoretical level predicted by PPP.  So yes, exchange rates show a tendency to revert to PPP, but the PPP itself fluctuates over time. 

Academic treatments of this effect (called the Balassa-Samuelson effect) can be found here:
http://www.nber.org/papers/w15868.pdf
http://www.jstor.org/stable/1829464?seq=1#page_scan_tab_contents
http://www.jstor.org/stable/1928178?seq=1#page_scan_tab_contents

[milesdividendmd]

Hallelujah!  Data!  I'll read later.

[johnny847]

I provided an academic paper with the following conclusion about currency market trading:

"Large deviations from the productivity weighted PPP do however produce a speedy and measurable mean reversion."

If you have any academic evidence to support your claim, please share it.  I am certainly no expert on currency markets, and merely am of the belief that when investing internationally you should either always or never hedge because currency risk tends to cancel itself out over long time horizons (ie revert to the mean.)

Alright, I think I see the problem -  you're misreading the paper.  Let's look at what that section actually says:

Identical commodities should sell at identical prices in different markets – after allowing for costs of transport. Rogoff (1996), in a valuable literature review, outlines a puzzle that – in the short run at least - they do not. In that paper, he suggests that while economists all believe that purchasing power parity (PPP) should hold in some form or other, it had taken some 400 years of research to find persuasive data to demonstrate that prices do tend to revert to the expected mean.

Now pair that with the conclusion:

It certainly appears to me that recent research has resolved the puzzle of PPP. Small deviations from PPP present little in the way of profitable arbitrage opportunities, and can remain for some time. Large deviations from the productivity weighted PPP do however produce a speedy and measurable mean reversion.

So the paper is saying exchange rates revert to PPP.  But you are assuming that that statement is equivalent to saying that exchange rates revert to a nominal mean.  There is simply no support for that statement anywhere in anything that you've quoted.

Perhaps you'd listen better to another source.  I direct you to http://2012books.lardbucket.org/books/policy-and-theory-of-international-finance/s09-05-ppp-in-the-long-run.html which shows that although exchange rates do fluctuate around a PPP level, this level is not constant.  The example they show in Figure 6.4 is the US/UK exchange rate since 1913, and actual exchange rates fluctuate around the theoretical level predicted by PPP.  So yes, exchange rates show a tendency to revert to PPP, but the PPP itself fluctuates over time. 

Academic treatments of this effect (called the Balassa-Samuelson effect) can be found here:
http://www.nber.org/papers/w15868.pdf
http://www.jstor.org/stable/1829464?seq=1#page_scan_tab_contents
http://www.jstor.org/stable/1928178?seq=1#page_scan_tab_contents

Thank you for this beltim. I remember being on a different thread where reversion to the mean came up and I just couldn't accept the belief that there is reversion to a nominal mean for currencies. Now I have some things to cite.

[Left]

I couple more days like today (so far) and yesterday... I guess by next week the correction will be "corrected" and we will be back to all time highs?

[ender]

I couple more days like today (so far) and yesterday... I guess by next week the correction will be "corrected" and we will be back to all time highs?

[Left]

hey, I don't really follow the market news... I don't know how long a correction should last :D So I'm picking Sept 16th

[fb132]

I am kind of pissed, I usually invest the first of every month and if it continues this way, it would mean I have missed out on any correction :(