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Black was right: Price is within a factor 2 of Value

J. P. Bouchaud, S. Ciliberti, Y. Lempérière, A. Majewski, P. Seager, K. Sin Ronia

posted on 04 January 2018

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We provide further evidence that markets trend on the medium term (months) and mean-revert on the long term (several years). Our results bolster Black's intuition that prices tend to be off roughly by a factor of 2, and take years to equilibrate. The story behind these results fits well with the existence of two types of behaviour in financial markets: "chartists", who act as trend followers, and "fundamentalists", who set in when the price is clearly out of line. Mean-reversion is a self-correcting mechanism, tempering (albeit only weakly) the exuberance of financial markets.