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Estimating the Mean‐reverting Component in Stock Prices: A Cross‐country comparison

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  • Liam A. Gallagher
  • Lucio Sarno
  • Mark P. Taylor

Abstract

This paper investigates the mean‐reverting component in real stock prices for sixteen countries using a Kalman filter maximum likelihood estimation procedure to measure the transitory, permanent and seasonal components. Evidence is provided supporting the mean‐reversion hypothesis that stock prices are not pure random walks: a statistically significant mean reverting component is found in each country's stock prices. Nevertheless, for twelve of the sixteen countries the transitory component does not explain more than 5% of the variation in stock prices.

Suggested Citation

  • Liam A. Gallagher & Lucio Sarno & Mark P. Taylor, 1997. "Estimating the Mean‐reverting Component in Stock Prices: A Cross‐country comparison," Scottish Journal of Political Economy, Scottish Economic Society, vol. 44(5), pages 566-582, November.
    • Handle: RePEc:bla:scotjp:v:44:y:1997:i:5:p:566-582
    DOI: 10.1111/1467-9485.00075
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    Cited by:

    1. Liam Gallagher, 1999. "A multi-country analysis of the temporary and permanent components of stock prices," Applied Financial Economics, Taylor & Francis Journals, vol. 9(2), pages 129-142.

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