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

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  • L. Spierdijk
  • J.A. Bikker

Abstract

This paper discusses the implications of mean reversion in stock prices for longterm investors such as pension funds. We start with a general definition of a meanreverting 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.

Suggested Citation

  • L. Spierdijk & J.A. Bikker, 2012. "Mean Reversion in Stock Prices: Implications for Long-Term Investors," Working Papers 12-07, Utrecht School of Economics.
    • Handle: RePEc:use:tkiwps:1207
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    File URL: https://dspace.library.uu.nl/bitstream/handle/1874/262525/12-07.pdf
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    References listed on IDEAS

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    Cited by:

    1. Luković Stevan & Marinković Srđan, 2019. "Comparative Analysis of Retirement Benefits in Private Pension Funds and Public Pension System," Economic Themes, Sciendo, vol. 57(2), pages 145-164, June.
    2. John B. Donaldson & Rajnish Mehra, 2021. "Average crossing time: An alternative characterization of mean aversion and reversion," Quantitative Economics, Econometric Society, vol. 12(3), pages 903-944, July.
    3. Siva Kiran & Prabhakar Rao.R, 2019. "Analysis of Stock Market Efficiency in Emerging Markets: Evidence from BRICS," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 22(72), pages 60-77, June.

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