Mean Reversion in Stock Prices? A Reappraisal of the Empirical Evidence
- 1 May 1991
- journal article
- research article
- Published by Oxford University Press (OUP) in The Review of Economic Studies
- Vol. 58 (3) , 515-528
- https://doi.org/10.2307/2298009
Abstract
The paper re-examines the empirical evidence for mean-reverting behaviour in stock prices. Comparison of data before and after World War II shows that mean reversion is entirely a pre-war phenomenon. Using randomization methods to calculate significance levels, we find that the full sample evidence for mean reversion is weaker than previously indicated by Monte Carlo methods under a Normal assumption. Further, the switch to mean-averting behaviour after the war is about to be too strong to be compatible with sampling variation. We interpret these findings as evidence of a fundamental change in the stock returns process and conjecture that it may be due to the resolution of the uncertainties of the 1930's and 1940's.This publication has 3 references indexed in Scilit:
- The size and power of the variance ratio test in finite samplesJournal of Econometrics, 1989
- Permanent and Temporary Components of Stock PricesJournal of Political Economy, 1988
- Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification TestThe Review of Financial Studies, 1988