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Mean Reversion in Equilibrium Asset Prices

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Author Info
Cecchetti, Stephen G
Lam, Pok-sang
Mark, Nelson C

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Abstract

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 the authors equilibrium model. From this evidence, the authors conclude that the degree of serial correlation in the data could plausibly have been generated by their model. Copyright 1990 by American Economic Association.

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Publisher Info
Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 80 (1990)
Issue (Month): 3 (June)
Pages: 398-418
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Handle: RePEc:aea:aecrev:v:80:y:1990:i:3:p:398-418

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  1. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March. [Downloadable!] (restricted)
  2. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November. [Downloadable!] (restricted)
  3. Summers, Lawrence H, 1986. " Does the Stock Market Rationally Reflect Fundamental Values?," Journal of Finance, American Finance Association, vol. 41(3), pages 591-601, July. [Downloadable!] (restricted)
  4. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-88, October. [Downloadable!] (restricted)
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  5. Kenneth D. West, 1988. "Dividend Innovations and Stock Price Volatility," NBER Working Papers 1833, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Neftci, Salih N, 1984. "Are Economic Time Series Asymmetric over the Business Cycle?," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 307-28, April. [Downloadable!] (restricted)
  7. LeRoy, Stephen F, 1973. "Risk Aversion and the Martingale Property of Stock Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(2), pages 436-46, June. [Downloadable!] (restricted)
  8. Grossman, Sanford J & Shiller, Robert J, 1981. "The Determinants of the Variability of Stock Market Prices," American Economic Review, American Economic Association, vol. 71(2), pages 222-27, May. [Downloadable!] (restricted)
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  9. Michener, Ronald W, 1982. "Variance Bounds in a Simple Model of Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 166-75, February. [Downloadable!] (restricted)
  10. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 246-73, April. [Downloadable!] (restricted)
  11. Robert J. Shiller, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," NBER Working Papers 0456, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October. [Downloadable!] (restricted)
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