Temporary Components of Stock Prices: A Skeptic's View (Reprint 032)

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Abstract
Recent empirical work has uncovered U-shaped patterns of large magnitude in the serial correlation estimates of multi-year stock returns. The current literature in finance has taken this evidence to mean that there exists a temporary component of stock prices. This paper provides an alternative explanation regarding these findings. Specifically, we show that the patterns in serial correlation estimates and their magnitude observed in previous studies should be expected under the null hypothesis of serial independence.
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