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Estimating the Mean‐reverting Component in Stock Prices: A Cross‐country comparison

Liam Gallagher (), Lucio Sarno () and Mark Taylor ()

Scottish Journal of Political Economy, 1997, vol. 44, issue 5, 566-582

Abstract: 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.

Date: 1997
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Handle: RePEc:bla:scotjp:v:44:y:1997:i:5:p:566-582