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Mean Reversion in Stock Prices: Implications for Long-Term Investors

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  • Laura Spierdijk
  • Jacob Bikker

Abstract

This paper discusses the implications of mean reversion in stock prices for long-term investors such as pension funds. We start with a general definition of a mean-reverting price process and explain how mean reversion in stock prices is related to mean reversion in stock returns. Subsequently, we show that mean reversion makes stocks less risky for investors with long investment horizons. Next, we consider a mean-variance efficient investor and show how mean reversion in stock prices affects such an investor's optimal portfolio weights. Finally, we discuss the implications of our findings for the investment decisions of long-term investors

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 343.

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Date of creation: Apr 2012
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Handle: RePEc:dnb:dnbwpp:343

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