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Mean Reversion in Stock Prices? A Reappraisal of the Empirical Evidence

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  • Myung Jig Kim
  • Charles R. Nelson
  • Richard Startz

Abstract

The paper re-examines the empirical evidence for mean-reverting behaviour in stock prices. Comparison of data before and after World War II shows that mean reversion is entirely a pre-war phenomenon. Using randomization methods to calculate significance levels, we find that the full sample evidence for mean reversion is weaker than previously indicated by Monte Carlo methods under a Normal assumption. Further, the switch to mean-averting behaviour after the war is about to be too strong to be compatible with sampling variation. We interpret these findings as evidence of a fundamental change in the stock returns process and conjecture that it may be due to the resolution of the uncertainties of the 1930's and 1940's.

Suggested Citation

  • Myung Jig Kim & Charles R. Nelson & Richard Startz, 1991. "Mean Reversion in Stock Prices? A Reappraisal of the Empirical Evidence," Review of Economic Studies, Oxford University Press, vol. 58(3), pages 515-528.
  • Handle: RePEc:oup:restud:v:58:y:1991:i:3:p:515-528.
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    File URL: http://hdl.handle.net/10.2307/2298009
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    1. Wilson, Jack W & Jones, Charles P, 1987. "A Comparison of Annual Common Stock Returns: 1871-1925 with 1926-85," The Journal of Business, University of Chicago Press, vol. 60(2), pages 239-258, April.
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