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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.