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

Gallagher Liam A. | Zendy; Sarno Lucio | Zendy; Taylor Mark P. | Zendy

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

Author(s) -

Gallagher Liam A.,

Sarno Lucio,

Taylor Mark P.

Publication year - 1997

Publication title -

scottish journal of political economy

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 0.4

H-Index - 46

eISSN - 1467-9485

pISSN - 0036-9292

DOI - 10.1111/1467-9485.00075

Subject(s) - mean reversion , stock (firearms) , economics , econometrics , kalman filter , random walk , financial economics , statistics , mathematics , geography , archaeology

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.

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