Topic
Mean reversion
About: Mean reversion is a research topic. Over the lifetime, 2735 publications have been published within this topic receiving 86254 citations.
Papers published on a yearly basis
Papers
TL;DR: In this article, the authors present a simple overlapping generations model of an asset market in which irrational noise traders with erroneous stochastic beliefs both affect prices and earn higher expected returns.
Abstract: We present a simple overlapping generations model of an asset market in which irrational noise traders with erroneous stochastic beliefs both affect prices and earn higher expected returns. The unpredictability of noise traders' beliefs creates a risk in the price of the asset that deters rational arbitrageurs from aggressively betting against them. As a result, prices can diverge significantly from fundamental values even in the absence of fundamental risk. Moreover, bearing a disproportionate amount of risk that they themselves create enables noise traders to earn a higher expected return than rational investors do. The model sheds light on a number of financial anomalies, including the excess volatility of asset prices, the mean reversion of stock returns, the underpricing of closed-end mutual funds, and the Mehra-Prescott equity premium puzzle.
6,813 citations
TL;DR: This article found that a slowly mean-reverting component of stock prices tends to induce negative autocorrelation in returns, which is weak for the daily and weekly holding periods common in market efficiency tests but stronger for long-horizon returns.
Abstract: A slowly mean-reverting component of stock prices tends to induce negative autocorrelation in returns. The autocorrelation is weak for the daily and weekly holding periods common in market efficiency tests but stronger for long-horizon returns. In tests for the 1926-85 period, large negative autocorrelations for return horizons beyond a year suggest that predictable price variation due to mean reversion accounts for large fractions of 3-5-year return variances. Predictable variation is estimated to be about 40 percent of 3-5-year return variances for portfolios of small firms. The percentage falls to around 25 percent for portfolios of large firms.
3,456 citations
TL;DR: In this paper, the static trade-off theory of corporate leverage is tested against the pecking order theory of Corporate leverage, using a broad cross-section of US firms over the period 1980-1998, and robust evidence of mean reversion in leverage is found.
Abstract: The pecking order theory of corporate leverage is tested against the static tradeoff theory of corporate leverage, using a broad cross-section of US firms over the period 1980-1998. A derivation of the conditional target adjustment framework is provided as a better empirical test of mean reversion. None of the predictions of the pecking order theory hold in the data. As predicted by the static tradeoff theory, robust evidence of mean reversion in leverage is found. This is true both unconditionally and conditionally on financial factors. Leverage is more persistent at lower levels than at higher levels. When debt matures, it is not replaced dollar for dollar by new debt and so leverage declines. Large firms increase their debt in order to support the payment of dividends. By contrast, small firms reduce their debt while they pay dividends.
2,421 citations
2,122 citations
TL;DR: In this article, the authors investigated whether stock prices are mean-reverting, using data from the United States and 17 other countries, and they found that there is positive and negative autocorrelation in returns over short horizons and negative auto-correlation over longer horizons.
1,784 citations
Related Topics (5)
Performance Metrics
| Year | Papers |
|---|---|
| 2025 | 52 |
| 2024 | 53 |
| 2023 | 88 |
| 2022 | 110 |
| 2021 | 75 |
| 2020 | 94 |