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Mean Reversion on Global Stock Markets

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  • Wolfgang Drobetz
  • Patrick Wegmann
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    Abstract

    This paper focuses on mean reversion on international stock markets and explores whether this empirical observation is compatible with a rational, general equilibrium asset pricing model. We consider a simple time series model with switching regimes for the consumption process in the G-7 countries and compare the simulated returns with historical stock market data. Our results show that for most countries the empirical mean reversion produces no challenge for an equilibrium model. Short-run momentum, however, cannot be explained within the same simple framework.

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    File URL: http://www.sjes.ch/papers/2002-III-1.pdf
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    Bibliographic Info

    Article provided by Swiss Society of Economics and Statistics (SSES) in its journal Swiss Journal of Economics and Statistics.

    Volume (Year): 138 (2002)
    Issue (Month): III (September)
    Pages: 215-239

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    Handle: RePEc:ses:arsjes:2002-iii-1

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    Related research

    Keywords: Asset Pricing; Mean Reversion; Variance Ratios; Regime Switching; Monte Carlo Simulation;

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    References

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    17. Ferson, Wayne E & Harvey, Campbell R, 1991. "The Variation of Economic Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 385-415, April.
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    20. Myung Jig Kim & Charles R. Nelson & Richard Startz, 1988. "Mean Reversion in Stock Prices? A Reappraisal of the Empirical Evidence," NBER Working Papers 2795, National Bureau of Economic Research, Inc.
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