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Mean Reversion in the United Kingdom Stock Market and its Implications for a Profitable Trading Strategy
Author(s) -
Sauer David A.,
Chen Carl R.
Publication year - 1996
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/1468-5957.00085
Subject(s) - contrarian , mean reversion , economics , financial economics , stock (firearms) , investment strategy , stock market , trading strategy , econometrics , monetary economics , market liquidity , mechanical engineering , paleontology , horse , engineering , biology
Following Fama and French (1988), we examine the mean reverting behavior of the United Kingdom stock market total returns over the period 1919 through 1990. Evidence of statistically significant mean reversion is only found during the pre‐war subperiod. A contrarian investment strategy, however, does not enhance performance over a naive buy and hold investment strategy. Further, an application of Richardson and Stock's (1989) alternative asymptotic distribution theory suggests that the mean reversion detected during the pre‐war period may reflect the poor finite sample approximation of traditional fixed overlap asymptotic distribution theory.