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Mean Reversion in Equilibrium Asset Prices

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  • Cecchetti, Stephen G
  • Lam, Pok-sang
  • Mark, Nelson C

Abstract

This paper demonstrates that negative serial correlation in long-horizon stock returns is consistent with an equilibrium model of asset pricing. When investors display only a moderate desire to smooth their consumption, commonly used measures of mean reversion in stock prices calculated from historical returns data nearly always lie within a 60 percent confidence interval of the median of the Monte Carlo distributions implied by the authors equilibrium model. From this evidence, the authors conclude that the degree of serial correlation in the data could plausibly have been generated by their model. Copyright 1990 by American Economic Association.

Suggested Citation

  • Cecchetti, Stephen G & Lam, Pok-sang & Mark, Nelson C, 1990. "Mean Reversion in Equilibrium Asset Prices," American Economic Review, American Economic Association, vol. 80(3), pages 398-418, June.
    • Handle: RePEc:aea:aecrev:v:80:y:1990:i:3:p:398-418
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