Average Crossing Time: An Alternative Characterization of Mean Aversion and Reversion

John B. Donaldson and Rajnish Mehra

No 25519, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We evaluate the properties of mean reversion and mean aversion in asset prices and returns as commonly characterized in the finance literature. The study is undertaken within a class of well-known dynamic stochastic general equilibrium models and shows that the mean reversion/aversion distinction is largely artificial. We then propose an alternative measure, the ‘Average Crossing Time’ that both unifies these concepts and provides an alternative characterization. Ceteris paribus, mean reverting processes have a relatively shorter average crossing time as compared to mean averting processes.

JEL-codes: C13 C53 E3 E44 E47 G1 G12 (search for similar items in EconPapers)
Date: 2019-01
New Economics Papers: this item is included in nep-ets and nep-mac
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Published as John B. Donaldson & Rajnish Mehra, 2021. "Average crossing time: An alternative characterization of mean aversion and reversion," Quantitative Economics, Econometric Society, vol. 12(3), pages 903-944, July.

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Journal Article: Average crossing time: An alternative characterization of mean aversion and reversion (2021)
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