Investment Under Alternative Return Assumptions: Comparing Random Walks and Mean Reversion
Gilbert Metcalf and
Kevin Hassett
No 175, NBER Technical Working Papers from National Bureau of Economic Research, Inc
Abstract:
Many recent theoretical papers have come under attack for modeling prices as Geometric Brownian Motion. This process can diverge over time, implying that firms facing this price process can earn infinite profits. We explore the significance of this attack and contrast investment under Geometric Brownian Motion with investment assuming mean reversion. While analytically more complex, mean reversion in many cases is a more plausible assumption, allowing for supply responses to increasing prices. We show that cumulative investment is generally unaffected by the use of a mean reversion process rather than Geometric Brownian Motion and provide an explanation for this result.
JEL-codes: C6 E2 (search for similar items in EconPapers)
Date: 1995-03
New Economics Papers: this item is included in nep-ifn
Note: PE
References: Add references at CitEc
Citations: View citations in EconPapers (75)
Published as Journal of Economic Dynamics and Control, vol.19, 1995, pp.1471-1488.
Downloads: (external link)
http://www.nber.org/papers/t0175.pdf (application/pdf)
Related works:
Journal Article: Investment under alternative return assumptions Comparing random walks and mean reversion (1995)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberte:0175
Ordering information: This working paper can be ordered from
http://www.nber.org/papers/t0175
Access Statistics for this paper
More papers in NBER Technical Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by (wpc@nber.org).