Mean Reversion Recast as Measurement Error: Lessons for Finance from Galston's Fallacy
AbstractThis paper explains why so many real life phenomena generate regression towards the mean or mean reversion results. We start our analysis by revisiting Galton's original paper on the height of children and the height of parents. We then show that the regression towards the mean result also holds for year-to-year performances of children in the L.A. school district, U.S. state unemployment rates, baseball player performances, and mutual fund rankings. To clarify the connection to a measurement error type problem, we relate the high temperature in various U.S. cities to the high in the previous year for randomly selected dates. Finally, we show how this hypothesis may apply to the price earnings ratio (P/E) anomaly and the stock market overreaction hypothesis.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Claremont Colleges in its series Claremont Colleges Working Papers with number 1999-17.
Date of creation:
Date of revision:
Contact details of provider:
Postal: 500 E. 9th Street, Claremont, CA 91711
Phone: (909) 607-3041
Fax: (909) 621-8249
Web page: http://www.claremontmckenna.edu/rdschool/papers/
More information through EDIRC
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.