Investment Under Alternative Return Assumptions: Comparing Random Walks and Mean Reversion

Gilbert Metcalf () and Kevin Allen 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)
New Economics Papers: this item is included in nep-ifn
Date: Written
Note: PE
View list of references View citations in EconPapers

Downloads: (external link)
http://www.nber.org/papers/t0175.pdf (application/pdf)
Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html.

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: http://EconPapers.repec.org/RePEc:nbr:nberte:0175

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/t0175
The price is Paper copy available by mail.

Access Statistics for this paper

More papers in NBER Technical Working Papers from National Bureau of Economic Research, Inc
Address: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Contact information at EDIRC.
Series data maintained by ().