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Nonlinear Mean Reversion in Stock Prices

  • S. Manzan
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    We investigate evidence for nonlinear mean reversion in yearly S\&P500 data from 1871 until 2001. We find that up to 1990 there is significant evidence of nonlinear mean reversion. In particular, stock prices are characterized by a persistent process close to the fundamental value. However, when prices deviate significantly a mean reverting regime is activated and prices adjust to fundamental values. Instead, the stock price run-up of the late 90s exacerbated the persistence of the deviations and there is no evidence for a mean reverting regime that drives prices back to fundamentals.

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    Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 264.

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    Date of creation: 11 Aug 2004
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    Handle: RePEc:sce:scecf4:264
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