MediumStochastic Processes
Half-Life of Mean Reversion
AQR CapitalMillennium Management
A spread follows an Ornstein–Uhlenbeck process dX = −κ(X − μ)dt + σ dW with mean-reversion speed κ = 0.5 per year. What is the half-life of a deviation from the mean, in years?
Approach
The expected deviation decays exponentially at rate κ.
Answer
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