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Mean Reversion in Stock Prices? A Reappraisal of the Empirical Evidence

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  • Myung Jig Kim
  • Charles R. Nelson
  • Richard Startz

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.

Suggested Citation

  • Myung Jig Kim & Charles R. Nelson & Richard Startz, 1991. "Mean Reversion in Stock Prices? A Reappraisal of the Empirical Evidence," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(3), pages 515-528.
    • Handle: RePEc:oup:restud:v:58:y:1991:i:3:p:515-528.
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    1. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-853, October.
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    4. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    5. Wilson, Jack W & Jones, Charles P, 1987. "A Comparison of Annual Common Stock Returns: 1871-1925 with 1926-85," The Journal of Business, University of Chicago Press, vol. 60(2), pages 239-258, April.
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