Could the Stock Market Adjust Itself? An Empirical Study Based on Mean Reversion Theory

Li Shuangjie (), Hu Xuefeng () and Wang Liming ()
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Li Shuangjie: School of Economics and Management, Beijing University of Technology, Beijing100124, China
Hu Xuefeng: School of Economics and Management, Beijing University of Technology, Beijing100124, China
Wang Liming: UCD Irish Institute for Chinese Studies, University College Dubin, UCD Belfield, Dublin, 4, Ireland

Journal of Systems Science and Information, 2020, vol. 8, issue 2, 97-115

Abstract: This paper mainly studies whether and how stock prices fluctuate around their intrinsic values. Based on data from 10 stock markets for the period between 2000 and 2018, we demonstrate that the relative price fluctuates around and approaches the intrinsic value in the long term. For the ten markets, the relative price crosses the intrinsic value on average once in 3 ∼ 4 years. Profitability growth is a key factor in rising stock prices, but the level of valuations in the market has a regulatory effect to the growth of price in the future: For every 1 % increase in valuation, the price tends to decline by 0.26% in the next year, 0.74% in the next 3 years.

Keywords: stock market; mean reversion; valuation ratio; adjustment mechanism; trend forecast (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:bpj:jossai:v:8:y:2020:i:2:p:97-115:n:1

DOI: 10.21078/JSSI-2020-097-19

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