IDEAS home Printed from
   My bibliography  Save this paper

Mean Reversion in International Stock Markets: An Empirical Analysis of the 20th Century


  • Laura Spierdijk
  • Jacob Bikker
  • Pieter van den Hoek


This paper analyzes mean reversion in international stock markets during the period 1900-2008, using annual data. Our panel of stock indexes in seventeen developed countries, covering a time span of more than a century, allows us to analyze in detail the dynamics of the mean-reversion process. In the period 1900-2008 it takes stock prices about 13.8 years, on average, to absorb half of a shock. However, using a rolling-window approach we establish large fluctuations in the speed of mean reversion over time. The highest mean reversion speed is found for the period including the Great Depression and the start of World War II. Furthermore, the early years of the Cold War and the period covering the Oil Crisis of 1973, the Energy Crisis of 1979 and Black Monday in 1987 are also characterized by relatively fast mean reversion. Overall, we document half-lives ranging from a minimum of 2.1 years to a maximum of 23.8 years. In a substantial number of time periods no significant mean reversion is found at all, which underlines the fact that the choice of data sample contributes substantially to the evidence in favour of mean reversion. Our results suggest that the speed at which stocks revert to their fundamental value is higher in periods of high economic uncertainty, caused by major economic and political events.

Suggested Citation

  • Laura Spierdijk & Jacob Bikker & Pieter van den Hoek, 2010. "Mean Reversion in International Stock Markets: An Empirical Analysis of the 20th Century," DNB Working Papers 247, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:247

    Download full text from publisher

    File URL:
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    1. JamesR. Lothian & MarkP. Taylor, 2008. "Real Exchange Rates Over the Past Two Centuries: How Important is the Harrod-Balassa-Samuelson Effect?," Economic Journal, Royal Economic Society, vol. 118(532), pages 1742-1763, October.
    2. 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.
    3. Summers, Lawrence H, 1986. " Does the Stock Market Rationally Reflect Fundamental Values?," Journal of Finance, American Finance Association, vol. 41(3), pages 591-601, July.
    4. Robert J. Barro, 2013. "Inflation and Economic Growth," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 121-144, May.
    5. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-853, October.
    6. Kristin J. Forbes & Roberto Rigobon, 2002. "No Contagion, Only Interdependence: Measuring Stock Market Comovements," Journal of Finance, American Finance Association, vol. 57(5), pages 2223-2261, October.
    7. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 407-443.
    8. McQueen, Grant, 1992. "Long-Horizon Mean-Reverting Stock Prices Revisited," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(01), pages 1-18, March.
    9. Conrad, Jennifer & Kaul, Gautam, 1988. "Time-Variation in Expected Returns," The Journal of Business, University of Chicago Press, vol. 61(4), pages 409-425, October.
    10. Taylor, Mark P & Peel, David A & Sarno, Lucio, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Toward a Solution to the Purchasing Power Parity Puzzles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1015-1042, November.
    11. De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
    12. Papell, David H., 1997. "Searching for stationarity: Purchasing power parity under the current float," Journal of International Economics, Elsevier, vol. 43(3-4), pages 313-332, November.
    13. Richardson, Matthew & Smith, Tom, 1991. "Tests of Financial Models in the Presence of Overlapping Observations," Review of Financial Studies, Society for Financial Studies, vol. 4(2), pages 227-254.
    14. David E. Rapach & Mark E. Wohar, 2006. "Structural Breaks and Predictive Regression Models of Aggregate U.S. Stock Returns," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 4(2), pages 238-274.
    15. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 246-273, April.
    16. Coakley, Jerry & Fuertes, Ana-Maria, 2006. "Valuation ratios and price deviations from fundamentals," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2325-2346, August.
    17. Taylor, Mark P. & Sarno, Lucio, 1998. "The behavior of real exchange rates during the post-Bretton Woods period," Journal of International Economics, Elsevier, vol. 46(2), pages 281-312, December.
    18. Kim, Chang-Jin & Nelson, Charles R., 1998. "Testing for mean reversion in heteroskedastic data II: Autoregression tests based on Gibbs-sampling-augmented randomization1," Journal of Empirical Finance, Elsevier, vol. 5(4), pages 385-396, October.
    19. Abuaf, Niso & Jorion, Philippe, 1990. " Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 45(1), pages 157-174, March.
    20. Jorion, Philippe & Sweeney, Richard J., 1996. "Mean reversion in real exchange rates: evidence and implications for forecasting," Journal of International Money and Finance, Elsevier, vol. 15(4), pages 535-550, August.
    21. Kim, Chang-Jin & Nelson, Charles R. & Startz, Richard, 1998. "Testing for mean reversion in heteroskedastic data based on Gibbs-sampling-augmented randomization1," Journal of Empirical Finance, Elsevier, vol. 5(2), pages 131-154, June.
    22. Gropp, Jeffrey, 2004. "Mean reversion of industry stock returns in the U.S., 1926-1998," Journal of Empirical Finance, Elsevier, vol. 11(4), pages 537-551, September.
    23. Jegadeesh, Narasimhan, 1991. " Seasonality in Stock Price Mean Reversion: Evidence from the U.S. and the U.K," Journal of Finance, American Finance Association, vol. 46(4), pages 1427-1444, September.
    24. Bali, Turan G. & Demirtas, K. Ozgur & Levy, Haim, 2008. "Nonlinear mean reversion in stock prices," Journal of Banking & Finance, Elsevier, vol. 32(5), pages 767-782, May.
    25. Ronald Balvers & Yangru Wu & Erik Gilliland, 2000. "Mean Reversion across National Stock Markets and Parametric Contrarian Investment Strategies," Journal of Finance, American Finance Association, vol. 55(2), pages 745-772, April.
    26. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October.
    27. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October.
    28. Gangopadhyay, Partha & Reinganum, Marc R., 1996. "Interpreting mean reversion in stock returns," The Quarterly Review of Economics and Finance, Elsevier, vol. 36(3), pages 377-394.
    29. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
    30. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    31. De Bondt, Werner F M & Thaler, Richard H, 1987. " Further Evidence on Investor Overreaction and Stock Market Seasonalit y," Journal of Finance, American Finance Association, vol. 42(3), pages 557-581, July.
    32. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-1617, December.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Wang, Juan & Zhang, Dongxiang & Zhang, Jian, 2015. "Mean reversion in stock prices of seven Asian stock markets: Unit root test and stationary test with Fourier functions," International Review of Economics & Finance, Elsevier, vol. 37(C), pages 157-164.
    2. Kim, Hyeongwoo & Ryu, Deockhyun, 2015. "Measuring the speed of convergence of stock prices: A nonparametric and nonlinear approach," Economic Modelling, Elsevier, vol. 51(C), pages 227-241.
    3. Hyeongwoo Kim & Jintae Kim, 2014. "London Calling: Nonlinear Mean Reversion across National Stock Markets," Auburn Economics Working Paper Series auwp2014-13, Department of Economics, Auburn University.
    4. repec:eee:finlet:v:21:y:2017:i:c:p:115-125 is not listed on IDEAS
    5. Sensoy, Ahmet & Tabak, Benjamin M., 2015. "Time-varying long term memory in the European Union stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 436(C), pages 147-158.
    6. Anna Kaliciak & Radoslaw Kurach & Walid Merouani, 2016. "Who is Eager to Save for Retirement – the Cross-Country Evidence," LWS Working papers 23, LIS Cross-National Data Center in Luxembourg.
    7. Lof, Matthijs, 2013. "Essays on Expectations and the Econometrics of Asset Pricing," MPRA Paper 59064, University Library of Munich, Germany.
    8. L. Spierdijk & J.A. Bikker, 2012. "Mean Reversion in Stock Prices: Implications for Long-Term Investors," Working Papers 12-07, Utrecht School of Economics.
    9. Akarim, Yasemin Deniz & Sevim, Serafettin, 2013. "The impact of mean reversion model on portfolio investment strategies: Empirical evidence from emerging markets," Economic Modelling, Elsevier, vol. 31(C), pages 453-459.
    10. Adam Zaremba, 2016. "Has the Long-Term Reversal Reversed? Evidence from Country Equity Indices," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 88-103, March.
    11. Ivanov, Ivan & Kabaivanov, Stanimir & Bogdanova, Boryana, 2016. "Stock market recovery from the 2008 financial crisis: The differences across Europe," Research in International Business and Finance, Elsevier, vol. 37(C), pages 360-374.
    12. Buckley, Winston S. & Long, Hongwei, 2015. "A discontinuous mispricing model under asymmetric information," European Journal of Operational Research, Elsevier, vol. 243(3), pages 944-955.
    13. Lof, Matthijs, 2012. "Heterogeneity in stock prices: A STAR model with multivariate transition function," Journal of Economic Dynamics and Control, Elsevier, vol. 36(12), pages 1845-1854.
    14. A. Sensoy & Benjamin Miranda Tabak, 2013. "How much random does European Union walk? A time-varying long memory analysis," Working Papers Series 342, Central Bank of Brazil, Research Department.

    More about this item


    mean reversion; market efficiency;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:dnb:dnbwpp:247. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rob Vet). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.