Mean Reversion in Equilibrium Asset Prices

This paper demonstrates that negative serial correlation in long horizon stock returns is consistent with an equilibrium model of asset pricing. When investors display only a moderate desire to smooth their consumption, commonly used measures of mean reversion in stock prices calculated from histori...

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Bibliographic Details
Published inThe American economic review Vol. 80; no. 3; pp. 398 - 418
Main Authors Cecchetti, Stephen G., Lam, Pok-Sang, Mark, Nelson C.
Format Journal Article
LanguageEnglish
Published Menasha, Wis American Economic Association 01.06.1990
Subjects
Consumption
Dividends
Economic models
Economic theory
Economics
Effects
Endowments
Equilibrium
GNP
Gross National Product
Market equilibrium
Markov analysis
Markov models
Monte Carlo simulation
Rates of return
Regression coefficients
Return on investment
Securities
Securities prices
Statistical analysis
Statistical median
Statistical variance
Stock exchange speculation
Stock prices
Studies
Utility functions
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Summary:This paper demonstrates that negative serial correlation in long horizon stock returns is consistent with an equilibrium model of asset pricing. When investors display only a moderate desire to smooth their consumption, commonly used measures of mean reversion in stock prices calculated from historical returns data nearly always lie within a 60 percent confidence interval of the median of the Monte Carlo distributions implied by our equilibrium model. From this evidence, we conclude that the degree of serial correlation in the data could plausibly have been generated by our model.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
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ISSN:0002-8282
1944-7981