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Mean Reversion in Stock Prices: Implications from a Production Based Asset Pricing Model

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  • Basu, Parantap
  • Vinod, Hrishikesh D

Abstract

A production-based asset pricing model explores the relationship between technological returns to scale and the time-series behavior of equilibrium asset returns. The authors find that stock prices are mean-reverting if there are strict diminishing returns in the underlying production technology. In economies where the technology displays increasing or constant returns, stock prices do not tend to revert to the mean. In view of this, the authors establish that consumption smoothing is necessary but not sufficient for mean-reversion in stock prices. Their unit root tests involving stock prices and returns reject the restrictions imposed by an increasing returns technology. Copyright 1994 by The editors of the Scandinavian Journal of Economics.

Suggested Citation

  • Basu, Parantap & Vinod, Hrishikesh D, 1994. " Mean Reversion in Stock Prices: Implications from a Production Based Asset Pricing Model," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(1), pages 51-65.
  • Handle: RePEc:bla:scandj:v:96:y:1994:i:1:p:51-65
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    References listed on IDEAS

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    Cited by:

    1. Caporale, Guglielmo Maria & Gil-Alana, Luis A., 2002. "Fractional integration and mean reversion in stock prices," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(3), pages 599-609.
    2. H. Youn Kim, 2003. "Intertemporal production and asset pricing: a duality approach," Oxford Economic Papers, Oxford University Press, vol. 55(2), pages 344-379, April.
    3. Basu, Parantap & Samanta, Prodyot, 2001. "Volatility and stock prices: implications from a production model of asset pricing," Economics Letters, Elsevier, vol. 70(2), pages 229-235, February.
    4. Lim, Kian-Ping & Kim, Jae H., 2011. "Trade openness and the informational efficiency of emerging stock markets," Economic Modelling, Elsevier, vol. 28(5), pages 2228-2238, September.
    5. Peng, Yajun & Shawky, Hany, 1997. "Productivity shocks and capital asset pricing," International Review of Economics & Finance, Elsevier, vol. 6(3), pages 303-316.
    6. Stephen Satchell & Christian S. Pedersen, 2000. "Evaluating the Performance of Nearest Neighbour Algorithms when Forecasting US Industry Returns," Working Papers wp00-01, Warwick Business School, Finance Group.
    7. Christian Pedersen & Stephen Satchell, 2003. "Can NN-algorithms and macroeconomic data improve OLS industry returns forecasts?," The European Journal of Finance, Taylor & Francis Journals, pages 273-289.

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